Our covered call writing positions are at risk when share price declines substantially. We do have, however, our exit strategy arsenal to protect against catastrophic losses. This article will show a real-life example of such a scenario with Novo Nordisk A/S (NYSE: NVO), in a series of trades shared with me by a BCI Premium Member.
NVO trades start-to-finish
5/22/2023: Buy 500 x NVO at $170.48
5/22/2023: STO 5 x 6/16/2023 $170.00 calls at $4.96
5/30/2023: BTC 5 x 6/16/2023 $170.00 calls at $0.45
6/1/2023: STO 5 x 6/16/2023 $157.50 calls at $4.00 (rolled-down)
6/1/2023: BTC 5 x 6/16/2023 $157.50 calls at $2.00
6/1/2023: Sell 500 shares of NVO at $154.78
Price chart of NVO showing the 3 trade dates
Trade entries & calculations using the BCI Trade Management Calculator (TMC)
Note that the final calculations (lower left of screenshot) reflect a loss for the 500 shares of $4595.00 or 5.39%. Could this loss have been mitigated? Yes!
The spreadsheet shows our exit strategy guideline price points. These were not adhered to. For example, the 1st BTC was at $0.45, not $0.99. This was an opportunity lost.
When viewing the price chart, we see at least 1 additional rolling-down opportunity prior to 5/30/2023, perhaps 2. Also, using the 7% guideline would direct us to sell the shares at $158.55, rather than $154.78.
Discussion
All in all, following the BCI exit strategy guidelines would have mitigated losses significantly. Not all trades will be winning ones. One of our missions is to utilize position management to mitigate losses and enhance gains.
Stock Investing for Students: A Plan to Get Rich Slowly and Retire Young
This is Alan’s financial literacy book (not option-related), currently used in 4 universities in the US.
Self-investing starting at a young age can ensure a successful financial future and an early and comfortable retirement. So why is nobody doing this? The answer includes such factors as the social pressures facing our youth, certain pre-conceived ideas regarding our ability to successfully self-invest and the education or lack thereof needed to motivate our youth to undertake such a long-term project. The purpose of this book is to change that way of thinking and create a goal and a user-friendly methodology that will facilitate a plan which will allow you to retire financially secure at a relatively young age.
Click here for more information and purchase link.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan and team,
Thank you for putting out such great content.
Keep up the awesome work.
Kind regards,
Ed
Upcoming events
1. BCI-only webinar (all invited to our 500 Zoom maximum)
Thursday November 9, 2023
8 PM ET – 9:30 PM ET
Scroll down and then “Click Here to register”.
Selling Cash-Secured Puts: Multiple Applications
Selling cash-secured puts is a low-risk option strategy geared to generating cash-flow, but always with capital preservation in mind.
This presentation will detail the strategy, incorporating the 3-required skillsets necessary to achieve the highest levels of returns … stock selection, option selection and position management.
If we allow exercise of the put options, shares are put to us at a price we agreed upon. What is our next step? This seminar will discuss potential paths we can take and the rationale behind these decisions, using real-life examples and calculations.
Q&A will include covered call writing, cash-secured puts and related strategies.
Zoom link will be sent to all those who register.
2. AAII Orange County, California Chapter
AAII Investment Club members only
Saturday November 11, 2023
Details to follow.
3. Mad Hedge Investor Summit
December 5 at 11 AM ET – 12 PM ET
Tuesday December 5, 2023
11 AM ET – 12 PM ET
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow
Investing with Stock Options
Hosted by Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI Managing Director
Selling stock options is a proven way to lower our cost-basis and beat the market on a consistent basis. Two such low-risk strategies are covered call writing and selling cash-secured puts. This presentation will detail how to incorporate both strategies into one multi-tiered option-selling strategy where we either generate cash-flow or buy a stock at a discount. I refer to this as the Put-Call-Put (PCP) Strategy, also referred to as the wheel strategy.
The basics and pros and cons are discussed as well as a real-life example and introduction into the BCI Trade Management Calculator (TMC). This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to beat the market on a consistent basis while focusing in on capital preservation.
Registration link to follow.
4. Long Island Stock Traders Meetup Group
Thursday February 15, 2024
7:30 PM ET – 9:00 PM ET.
Details to follow.
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 11/03/23.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.
Best,
Barry and The Blue Collar Investor Team
Morning Alan,
As I’m going thru the Ask Alan videos, they have been very useful. You’ve covered a lot of questions I had. It’s a great teaching tool and you’re a great teacher! But now, a question has occurred to me.
I have a question about the 7% rule. I’ve been using the stock screen and watch list for about 6 months. And I’ve followed the 7 % rule ( sometimes :-). But then I’ve seen that same stock come back on the report later. And I think I would have been better off to have NOT followed the 7 % rule because I might have avoided a realized loss, rolled out and down, and lowered my cost basis. So does the 7% rule strictly apply to ALL stocks, or would you make any exceptions.
Regards,
John
John,
I always frame my exit strategies as “guidelines”, not rules.
The main go-to guideline for covered call writing are the 20%/10% guidelines. From there, we have 14 different exit strategies opportunities, as detailed in my 8th book, Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts”.
A little background: Over the years, members have asked when to sell the underlying security, if share price is declining. We can roll-down, seek to “hit a double” or sell the stock (or ETF). One guideline in my material is to sell if the underlying is dramatically under-performing the market (S&P 500). Still, members were asking for a % guideline. We decided on 7%, which aligns also with IBD guidelines.
I use a combination of under-performing the market & the 7% guideline. For example, if the stock drops by 7% but is equal to or better than the performance of the overall market, I am more likely to keep the stock.
Alan
Thanks. That seems pretty sound. I like the part about checking to see how the overall market is doing relative to a declining in stock. I should have asked you sooner :-). I’d have a few more dollars in my account.
John
Alan
I loved your presentation at the Money Show. The only thing missing was a discussion of option price volatility.
Do you buy low/sell high, and if not why?
Also do you ever use delta neutral strategies to repair trades?
Thanks
Dan
Premium members:
This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team