One of the covered call writing exit strategies available to us is hitting double. In March 2021, Duane shared with me a trade he executed using this strategy and inquired about how to enter this series of trades into the BCI Elite-Plus Calculator.
What is hitting a double?
This position management tool is implemented when a stock price decline causes the option premium to decline to the 20%/10% thresholds. This guides us as when to close the original short call. Our goal is to watch for share price recovery and then re-sell the same option at a (now) higher price thereby generating 2 income streams in the same contract month with the same stock and cash investment.
Duane’s hitting a double trades
- 2/25/2021: Buy RDFN at $79.05
- 2/25/2021: STO the 5/21/2021 $80.00 call at $10.55
- 3/5/2021: BTC the 5/21/2021 $80.00 call at $2.12 (20% guideline)
- 3/11/2021: STO the 5/21/2021 $80.00 call at $3.25
RDFN: Entering trade data into the Elite-Plus Calculator
RDFN: Data Entry
RDFN: Trade structuring initial calculations
RDFN: Initial Calculations Using the Elite-Plus Calculator
The initial 3-month time-value return is 13.30%, 53.2% annualized.
Calculations after hitting a double
RDFN: Calculations After “Hitting a Double”
The initial 3-month time-value return increases to 14.80%, 59.2% annualized
Discussion
To calculate hitting a double results using the Elite-Plus Calculator, the only stat that needs to be adjusted in the net option premium. The time it takes to execute these exit strategy maneuvers is minimal yet the results will have a significant positive impact on our overall results.
***For more information on the BCI Elite-Plus Calculator, click here.
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:
Alan,
I appreciate everything you do. I learned how to trade options using your course. So far I’ve had phenomenal success. I started trading options in Jan. 2021 and have added $7000.00 to my small account. Well thanks to you and AMC! Just very appreciative of your explanation of option trading. Can’t thank you enough. Love you man.
James C.
Upcoming events
1- BCI-Only Webinar: Free Webinar Covered Call Writing and Selling Cash-Secured Puts
Covered Call Writing and Selling Cash-Secured Puts: 2 New Strategies Developed by BCI
The VOLQ-covered call strategy and Weekly 10-Delta Put-Selling strategy
August 19, 2021 (Thursday)
8 PM – 9:30 PM ET
- A link will be posted on the BCI site and emailed to all those on our mailing list as the event approaches
- No pre-registration needed
- Our platform allows the first 500 attendees to access the webinar
2- Mad Hedge Traders and Investors Summit: Free webinar
September 14th – 16th, 2021
Information and registration link to follow.
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Alan,
I’ve been wheeling ARKK ETF for about three months now. It’s been a good underlying for me generating about 1% to 1.3% cash every 14 days or so, net of downside protection. I’m coming up on earnings releases for its top 5 and 10 holdings over the course of July 26 to August 12th (starting with Tesla on Monday). Do I need to avoid selling CC’s and CSP’s for the next couple weeks?
I started wheeling ARKK the first week of May and wasn’t paying attention to Q1 earnings releases at the time. They were probably wrapping up earnings releases when I sold my first CSP back in May.
Thanks,
Brian
Brian,
Excellent question.
In the BCI methodology, we do not factor in earnings releases for ETFs but do for individual stocks which are at much greater risk of share depreciation from a disappointing report than are “baskets of stocks”.
With ETFs, earnings releases will be on multiple days with some favorable, some disappointing and others meeting consensus. Since the risk is much less for ETFs, in our BCI methodology, these securities are eligible during earnings season.
Alan
Hi BCI’ers,
I’ve been having problems with my BCi email account. The problems are limited to my account and do not affect or impact any other BCI email accounts or other BCI website functions. While our web team is working through the problem, I’ve set up a temporary email account. For those of you who may have sent me emails over the last few days, please resend those emails to:
barry.bergman.bci@gmail.com
If you need to reach me via email over the next few days, please use the above temporary account. I’ll post an update as soon as the problem is resolved.
Best,
Barry
Hi BCI’ers,
My BCI email address is back up and running. A big thank you to our web wizard, Gabe.
Best,
Barry
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 07/23/21.
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:
http://www.youtube.com/user/BlueCollarInvestor
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Since we are now in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Alan,
I’ve been studying your excellent video on the poor man’s covered call and wanted to know your thinking about rolling up in the same contract month. You allow this in the pmcc but not recommended for standard covered call writing.Pleas explain.
Thanks,
Gail
Gail,
There are several differences between traditional covered call writing and the PMCC strategy. One of those is the long-term commitment implied with PMCC. The deep in-the-money LEAPS is, on average, 1 – 2 years out and the plan is to write short-term out-of-the-money calls against the long LEAPS.
With traditional covered call writing (outside portfolio overwriting), our portfolios turn over frequently especially regarding earnings reports so we avoid the risk of profit-taking when shares price accelerates exponentially in a short time-frame.
It is important to understand the differences between traditional covered call writing and the PMCC along with all the moving parts inherent in the latter strategy.
Alan
Alan,
How do we use the bci calculators when using the hitting a double exit strategy? I’m interested in the current and final status of these trades.
Thanks lot,
Marty
Marty,
Here is a link to an article I published 2 years ago on this topic:
https://www.thebluecollarinvestor.com/using-the-ellman-calculator-to-monitor-hitting-a-double-results/
Alan
Alan;
I’m a real newbie with all this (still viewing your “Beginner” series of videos (THANKS)).
I’m worried about a MAJOR market crash….worse than Mar. 2020.
I know you advise “protection” by : Buying at least 5 different symbols, in different “fields (Tech vs. services etc), your technical and fundamental selection criteria and –once entered– your 10/20% stop losses.
I know there is no RISK-FREE trading but how do you protect yourself from a potential (imminent?) major crash of the underlying(s)?
THANK YOU
Ken
Ken,
Your concern is related to overall market performance, not specific for option-selling. I understand. Although I don’t see an “imminent” crash on the horizon, anything is possible as we witnessed with the COVID-crash in March 2020.
We do have a lot to be optimistic about. Low interest-rates, a recovering economy, stellar sales and earnings reported by corporations and little competition from other investment venues.
Also, consider that we are undertaking monthly or weekly obligations and can reassess our bullish assumptions on a frequent basis and set up our portfolios accordingly.
As you study the BCI material, you will see a multiplicity of approaches we can take to counter a bear market bias. Examples include using deep in-the-money calls, deep out-of-the-money puts, protective puts, low-volatility stocks and ETFs, combining covered call writing and selling cash-secured puts (PCP Strategy) into 1 multi-tiered option-selling strategy among others.
Take your time to master the material and paper-trade before risking even one penny of your hard-earned money. Your confidence will grow and then you will have years and decades to benefit from these low-risk strategies.
Finally, historically, the market appreciates 8% – 10% per-year. When we invest in the stock market we are riding our bicycles downhill, not uphill. We must remain vigilant, but the odds are on our side.
Alan
Premium Members,
This week’s report, dated 07/23/21, shows that HIBB has weekly options. This is a typo…HIBB does not have weeklies. HIBB only has monthly options. A thank you to Ed for identifying the typo.
Best,
Barry
Alan,
I’m a recent member, I’ve read your books and watched many of your videos. I do have one question. I’ve a couple of questions that perhaps you could address in the future if others show an interest.
First question.
I frequently have stocks that are growing at a decent rate. Presuming you are working in a tax advantaged account where capital gains aren’t a concern, why do you recommend rolling out / rolling out & up an option instead of just allowing the call to be exercised, and selling a covered put to regain the account?
It would seem you would retain more net premium, without having to “buy up” the value of the stock each month. I’ve seen good returns on the puts for these rising stocks, often making doubles etc. during the month.
I’ve been doing this for a while, with pretty decent success. Alternatively selling a call and put simultaneously seems to work as well.
What are your thoughts?
My second question, do you have a publication regarding your ideas on trading QQQ? I’ve seen a couple short articles you wrote, but I wondered if you had anything in more depth?
—
Matt
Matt,
We consider rolling an in-the-money option as expiration approaches when the following parameters are in place:
1. The underlying still displays strong fundamentals and technicals.
2. There is no upcoming earnings report during the next contract period.
3. The initial time-value return goal range is met after incorporating the time-value cost-to-close (pennies as expiration approaches).
If these requirements are satisfied, rolling is a reasonable choice. In other words, “if the deal is there, take it”
If we allow assignment, the cost to repurchase the stock the following week is undetermined but even if the price remains the same, we would still have to include the intrinsic-value component of the previous cost-to-close. Of course, the stock price could decline on Monday, we just don’t know.
If we allow assignment and then write a cash-secured put, we are now using the PCP (put-call-put) strategy, a wonderful approach to option-selling. We must take a step back and identify the strategy we are employing… covered call writing or the PCP strategy. Both are outstanding approaches to cash generation but the trade executions will differ. If we are using covered call writing, rolling may to the best choice. If PCP, allowing assignment is an integral part of the methodology.
I’ve written dozens of articles and produced quite a number of videos on QQQ, the ETF I’ve used the most over the past 2+ decades. Here is a link to one such publication:
https://www.thebluecollarinvestor.com/making-money-with-technology-stocks-investing-with-qqq/
If time permits, I suggest you login to our BCI-only free webinar on August 19th, where I will be spending half the presentation on QQQ. Login links will be published on this site (event link), in our weekly newsletter and mailed to premium members and those on our mailing list soon.
Alan
Alan,
i sold aug $55 put on KWEB (last friday), received $2.35 per contract. Well, not looking good, ugh, a second large gap down
how to handle, never been in this spot
re-assess after two weeks?
thanks
George
George,
The BCI guideline for closing short puts is when share price declines > 3% below the out-of-the-money put strike, $53.00 in this case.
We should also ask ourselves if the reasons we used this particular underlying are still in place? The answer to this question is likely “no” since share price has declined dramatically since entering the trade.
KWEB is a Chinese internet company which has quadruple the implied volatility of the S&P 500. This high IV results in juicy option premiums but also puts us at risk to substantial share price decline. Is this an appropriate underlying that aligns with our personal risk-tolerance? For some, yes; for many, no.
If we studied a 2021 price chart of KWEB, we would note that in January this ETF was trading > $100.00/share and has lost half it value since.
It is certainly possible that KWEB can make a big comeback. The question we ask ourselves is whether we want to hang our hats on this security or move a a better performer?
Alan
Alan,
I hope all is well. I subscribed to the Premium Membership yesterday and as we have communicated I the past, I have to focus strictly on ETFs. I plan on using my paper trading account for several weeks if not months before using real money. What would you recommend to get started?
Should I just pick a few of the ETFs on last week’s list and then execute the trade and watch what they do between now and expiration?
Regards,
Mike
Mike,
Yes, this is a reasonable approach and congratulations on your willingness to do your due-diligence.
First, determine the amount of cash you plan to allocate to your option-selling portfolio when real-life trading begins. From there, have a look at the ETF prices in the most recent ETF Report (new one tonight) to determine how many different securities align with the cash available. Make sure that at least 2% of the cash available is reserved for potential exit strategy opportunities.
Enter the trades into the paper-trade platform setting up the 20%/10% buy-to-close limit orders on the short calls and then manage away.
At first, this will all be a bit intimidating and eventually will become second nature.
You’re off to a great start.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
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
Alan,
Good evening. Sorry to bother you with this elementary question but I couldn’t find anything on it in the tutorials or on the IB website.
Below is a screenshot of what I setup in my paper account.
Does the negative -228 mean that I am positive? If the option was to end today (assuming today was 8/20) would that amount be credited to my account?
Purchased XME at an average price of 42.72, Sold the Aug 20 Call at 42.00.
Thanks for all your help.
Mike
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Mike,
In our BCI community, every question is an important one.
When we sell a covered call option, it represents a “short” position… we are selling a security we never owned. This is reflected in our brokerage account as a negative (-) until the option is closed, exercised or expires worthless. The premium, in its entirety is added to our cash account.
The cash we received when we sold the option is ours to keep. The current option market value listed in the brokerage account reflects the cost to close (buy back) the option should we decide to take that action.
The stock position is not reflected in this stat but the brokerage account statement will update that current market value as well.
Right now, XME is still trading above the $42.00 strike and has actually moved higher. At this point in time, the trade is looking good.
As an example of a final outcome: If the stock price remains above the $42.00 strike at expiration and if we take no action to close that short call, our shares are sold at $42.00 for a loss of $0.72 per-share and the entire option premium will be a realized credit to the cash account.
Alan