One of our BCI covered call writing exit strategies is titled “hitting a double” This opportunity arises when share price declines after a covered call position is opened, short calls are bought back using our 20%/10% guidelines and then the same option is re-sold when share price rises. This article will highlight how to use the multiple tab of The Ellman Calculator to update and monitor our positions when implementing this position management technique.
Chart pattern when “hitting a double”
Classic V-Shaped Chart Pattern When “Hitting a Double”
Hypothetical “hitting a double” series of trades
- Buy BCI at $48.00
- Sell the $50.00 call for $2.00
- Stock price declines such that the $50.00 call premium meets the 20% guideline (premium value declines to $0.40 or lower)
- Share price rises such that the $50.00 call value rises to $1.00 (in this hypothetical)
Overview of trades
The cost basis of $48.00 remains the same throughout these trades, option credit/debit is moving in both directions and upside potential from $48.00 to the $50.00 strike remains constant at $2.00. With these facts in mind, we can monitor the trades by simply changing the option credit throughout the various legs of the trades. The option credit starts at $2.00, drops to $1.60 and then moves up to $2.60
The Ellman Calculator monitoring the “hitting a double” trades
“Hitting a Double” Calculations
- Brown field: Options returns move from 4.2% to 3.3% to 5.4% as options are sold, bought back and then re-sold
- Yellow field: Upside potential remains constant at 4.2%
- The stock side of the final trade will be determined by the price of the stock at contract expiration
The screenshot shows the trade adjustments on different lines. In real-life trading we can simply adjust the top line in the spreadsheet.
Discussion
The “hitting a double” exit strategy has 3 legs that can be monitored using the multiple tab of the Ellman Calculator by adjusting the net option credit during the life of the trade. Final results (realized or unrealized) will be calculated when stock price at expiration is known.
***For more information on covered call writing exit strategies:
Complete Encyclopedia for Covered Call Writing- classic edition: Pages 245 – 302
Complete Encyclopedia for Covered Call Writing- Volume 2: Pages 243 – 272
Exit strategy sections of DVD Programs
For a real-life example of “hitting a double”, 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,
My name is Francesco, Italian national living in UAE, commercial airline pilot, 34 years old.
I have been following your blogs and videos for some time and I have been really impressed, thank you so much for your work! The feedback I have seen on BCI has been truly amazing!
It would be an honor to meet you some day!
Best regards,
Francesco
Upcoming events
-May 8th
Alan will be hosting a free webinar for the Options Industry Council (OIC) on generating income from selling options. Click here to register for free.
-May 13th
All Stars of Options
Bally’s Hotel, Las Vegas
10 AM – 10:45 AM
How to Select the Best Options in Bull and Bear Markets
Free event
-May 14th
Las Vegas Money Show
Bally’s/ Paris Hotel
12:15 – 3:15
Master class encompassing covered call writing, put-selling and the stock repair strategy
This is a paid event hosted by The Money Show
***Alan will also be doing book-signing event at The Las Vegas Money Show
***Market tone data is now located on page 1 of our premium member stock reports.
How can I find out if a stock is standard or non standard?
Thank you.
Ken
Ken,
Non-standard options are the result of various corporate actions that result in the need for option contract adjustments such that buyers and sellers of calls and puts are “made whole”
Here are links to articles I’ve published on this topic:
https://www.thebluecollarinvestor.com/reverse-splits-and-unreliable-options-chains/
https://www.thebluecollarinvestor.com/non-standard-options-what-they-are-and-why-we-should-avoid-them/
https://www.thebluecollarinvestor.com/open-interest-and-volume-plus-non-standard-options-2/
Alan
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 04/18/19.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your
convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Since we are 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
Alan,
When you choose new candidates for option selling do you also use stocks that are marked red in Premium report (PASSED PREVIOUS WEEKS & FAILED CURRENT WEEK) or you limit your selection exclusively to stocks that passed screens during the current week?
Sunny
Sunny,
We use the stocks in the white cells. These are the strongest candidates at the time the report was constructed. This is the reason we update stock and ETF reports weekly…to have the most up-to-date information. If we already own a stock in the red cells, we manage with our exit strategies and don’t automatically sell them because they moved to a lower level in the report.
Alan
Alan
I contacted you awhile back because Fidelity wouldn’t let me do covered calls and asked you what I could do about it. I had my IRA in the right account to trade stocks or options like you mentioned. I decided to switch back to TDAmeritrade. When I signed up I checked the box to do options and just selected covered call writing. They ok’d it right away and a few days later I received a letter stating I could do covered calls. I hadn’t even put any money into my accounts yet !!
You asked me to let you know the out come, so this is the reason for the email. I would just like to say thanks for giving me advice. I will paper trade on Think or Swim until I can enter my trades quickly and accurately. I am glad I purchased your videos and books. They really make it easy to understand covered calls and adjusting my covered calls to how the price moves until expiration date. I receive your weekly Premium report also. It is a time saver.
Thank You
Harry
Harry,
Glad to help and pleased to have you as a new member of our BCI community.
Alan
Trading Experiences …… Fidelity, Etrade, Application process, tips, observations
Harry,
I initially had problems with Fidelity as well but persisted till I understood their forms and proper check boxes to select. Even after 2 years of trading i found out other trading features that I could use in my trading that Etrade (which I also use), for example, did not offer with IRAs.
One problem is, that if they reject you for any reason, they send you a letter (takes days to receive) and don’t bother to call you to tell you they were rejecting your application. I had to call to stay on top of any rejection to understand why. If not satisfied, I find that calling again and getting a different representative will get you more information from a different perspective to determine your problem and next action. That is a golden rule I always follow.
Perhaps my comments below will help someone.
I initially had Covered writing only. After 6 months, I added Cash Secured Puts once I understood I was not approved yet for that.
After 2 years, I added margin for my individual accounts in Fidelity and Etrade (so I could trade spreads in the future), intending never to use the margin for a loan and get charged for it. With margin, I found I had a benefit that I could buy and sell long positions without regard to being careful about the settlement date and getting a Good Faith trading violation. As long as I had cash (though not settled), there was no margin charge.
Then by chance, I found that Fidelity IRA’s had a feature called “Limited Margin” (just an online check of a form) that gave me the same capability to buy and sell long positions without regard to the settlement date, as long as there was cash available (settled or unsettled) (no margin loans). Etrade does not have a similar feature for their IRAs, so I do have to watch the settlement dates when that problem can occur. I understand other brokers have a similar limited margin feature for IRA accounts.
*****
Here is information on their forms and application process.
For all their accounts, you have the Investment Objective and the Trading Strategy.
The investment objective goes from Short Term… Balanced… Aggressive Growth… to Most Aggressive (6 categories)
The Trading Strategy goes from Type A (Writing of Covered Calls), Type B (Purchase of calls and puts and writing of Cash Secured Puts) … t o Type E (Uncovered writing of Index Options) (5 Categories).
*****
Goal A: – For covered call writing ONLY (not cash secured puts):
** Investment Objective: Can be any check box
** Trading Plan: Select Type A only for covered call writing
Goal B: For covered call writing and Cash Secured Puts writing (This supports BCI writing of Covered Calls and writing of Cash Secured Puts):
** Investment Objective: You MUST select MOST AGGRESSIVE check box. (Any other box, they will reject you and send you that slow letter.)
** Trading Plan: Select Type B, which includes Writing of Covered calls and Cash Secured Puts. This trading plan also includes purchases (buying only) of Puts and Calls for the Collar strategy and Married Puts, which requires buying Puts in addition to the Short Call.
*****
For Etrade Brokerage Individual and IRA accounts. I found that Etrade’s Covered call category includes Cash Secured Puts (Fidelity’s writing of cash covered puts). They do not split it up like Fidelity does.
*****
Here are some other tips or observations that I have used or learned with Fidelity and Etrade:
* If you accidentally make a trade in your Individual account when you meant the trade for the IRA, you can call the broker to move the account without any trouble (before settlement dates) (instantly).
* Once in my early days, I accidentally purchased a call (Buy to open) when I meant Sell to Open. After my explanation, Fidelity cancelled the purchase the same evening.
* Fidelity keeps in the History log the settlement date for you to check. Etrade does not specifically list this in their transaction log so you mentally need to be aware of it.
* Etrade’s account value that is displayed at market close each day does not change or vary overnight. It is the final value. Fidelity’s account value at closing is a temporary value until update hours later after midnight to the accurate value.
* Etrade’s computer system. though it displays the account value correctly at market close, does not update the SEC Regulatory fee in the transaction log till the next morning before market open.
Good luck in your trading.
Mario
The rule regarding not writing covered calls during earnings reports is in regards to only that particular company, correct? Like, I don’t have to put all covered call writing on hold from now until – say -somewhere in the middle of May? The trick is to find great uptrending companies who do not have a report coming out during the life of the call written, right?
Joanna,
Correct. The rule applies on a stock-by-stock basis. There will always be stocks not reporting in a particular contract month or even ETFs we can use to populate our portfolios even in the heart of earnings season. We can also use stocks that report in the first week of as contract, after that report is published.
Alan
Jay,
Buy / Wait covered call:
XBI ETF keeps giving me favors. I bought long positions in two accounts at 84.92 last Thursday 4/17 on the market down day. I waited till today 4/23 to sell an OTM short call at Strike 88. Static return is 5.4%, If exercised (strike 88) is 6.2%.
Since I hold 300 shares purchased at 96.9 some time ago, if the above get assigned, I will specify with my broker the specific lot so I have a realized gain and avoid a realized loss with the incorrect lot.
Mario
Hey Mario,
Thanks for the mention and comment! Congrats on your smart trading as always!
I have some XBI and XLV in my investing account and they have been good over writes lately as they struggle. I don’t plan on exiting the sector so may as well ring the register a bit!?
As the regulars know, I have suggested what I call “buy/wait” where you buy the stock/ETF on a down day then cover it on an up day like Mario just did with XBI.
Like everything else it has pro’s and con’s. You can get the jump on some price movement like Mario did but you can also lose days of time decay waiting. It works best when price is moving and not so well when things are static. – Jay
Jay – If I can get for a third month in a row a Hit a Double, then I will have bases loaded!. Let’s wait till I get to that point before I look for a Home Run.
Yes, I agree with you. I tried buy wait for a while a year ago, and it sometimes does not work out as the stock goes south and I lose the opportunity (oxymoron?) to implement the 20% rule buy back. Best time is when there is some long lasting volatility. Example: EDU in the past worked well but then went south on me. It comes to a point where the declining phase does not reverse and you end up not winning. We are all looking for the fountain of youth solution to this business, but of course, there isn’t any.
I know you like QQQ. How did you handle the market downturn from 9/2018 to 12/24/2018? Keep it long and just wait for a reverse? Purchase puts for a profit? – Mario
Hi Mario,
Thank you for your kind follow up. Knowing you my bet is you load the bases AND hit a home run!
I appreciate your amazing recall and thoughtful mention that I do indeed like QQQ. I did not sell any of it last year. I consider Tech an investment theme. I add to it on weakness.
Yet while my holdings were getting battered I was over writing them to ease the pain and doing a lot of put buying in my options trading IRA often on a day trade basis at resistance levels. I had my best quarter ever as a trader.
But that was then and this is now. I am adrift at the moment struggling to find the trading rudder. It is a great market but I don’t trust it. The best thing about sticking with a system like BCI ignoring the vagaries of the wind is one usually does better over time. – Jay
Buying puts for the decline of the market costs additional cash.
I guess that is a good reason to keep a larger cash reserve on the sidelines for that possibility. What I have been doing, was to invest with CC at 92%, that does not leave me any cash left for bearish options for the 5 different position which went south. Since you can’t predict the reversal that cash must be available at all times.
Assuming an 100,000 portfolio where an option trade cost for purchase 4% means you should reserve 4000 and maybe another 3% for buyback on the upside when working with puts – give $7000.
We have other funds in CDs, tax deferred annuities, and emergency funds that are untouchable for that moment in the future when it may be needed.
in fact, I was just evaluating our 2 LTC (long term Care) insurance plans we have with Genworth-com since 1999 when I was 57. They announced an increase in premiums again. Still a great value.
I read about about two interesting statistics on the costs for care at Genworth’s website:
** The average long term care event is 3 years.
** 75-80% of long term care events cost less than $250,000
Mario
Alan,
In this week’s stock report there are several stocks that have earnings this week. For example, Intel reports on Thursday and it’s one of the stocks I like from the report. Can I use Intel on Friday or should I wait for next week? In one of your Ask Alan videos you said that there is little advantage to entering a trade before the weekend.
As always thank you for all you do.
Marsha
Marsha,
When deciding to enter a trade on Friday or the following Monday, I give a slight edge to Monday. The reason is that market-makers factor in Theta (time value erosion) on Thursday or Friday before the weekend so there is little , if any, time value lost by waiting until Monday. Another advantage is that we are avoiding weekend risk of bad news coming out… a slight edge to Monday.
Alan
Good morning Alan:
Do you have or are you familiar with someone who has a tool that automates and updates the keeping track of the earning dates of a watch list, say, of 50 stocks?
Thank you in advance.
I plan on attending the money show in Las Vegas.
Take care,
Horacio
Horacio,
I do not know of such a software program for retail investors. There may be vendors that provide this information to institutional investors at a very high cost.
For a reliable free site for earnings report dates check out:
http://www.earningswhispers.com
Please introduce yourself to me in Las Vegas.
Alan
Alan,
I hope all is well.
IRBT was on the BCI Premier List this week, but, of course, not approved because of earnings this week (today).
What a drop today, almost $28.00 and its still only 2:00 PM as the time I am composing this.
. I hope nobody was in the trade and if so, they have learned the hard way why you advocate not to hold through earnings.
But a quick question. Assuming this holds in the IBD 50, would you jump in here around $100.00 ? Calls look nice and rich and the bad news is done, it seems to me to be good upside opportunity.
Cheers,
Jim
Jim,
A disappointing earnings report caused IRBT share value to decline by over 20% Now this could be a buying opportunity but how would we come to that conclusion and justify purchase of new shares?
In the BCI methodology, we first screen fundamentally and then technically. Well, the fundamentals broke down as a result of this report causing the technical indicators to turn bearish, both the trend-identifying and momentum-identifying parameters.
If we can provide sound, non-emotional reasons to now buy IRBT then we go for it. If not, we let is pass until the stock meets our system criteria.
Alan
Premium members:
This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.
New members check out the video user guide located above the recent reports.
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:
Some people may think they should hold through earnings as the stock may rise considerably – and they may write calls for such a scenario. The wisdom of not holding through earnings took some time to get through to me. IRBT and XLNX , this week. I built in some price protection using mid to deep in the money calls but it was not sufficient.
So here is my advice to anyone who thinks that should hold through earnings:
No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings! No, DO NOT hold through earnings!
There, I’ve told whoever thinks they should hold through earnings 50 times – Don’t do it! Listen to Alan!!
Ed
Ed,
I learned the hard way too… back in the day. A hard lesson can be a positive experience if it puts cash in our pockets for years and decades moving forward.
Agreed x 50.
Alan
One more thing about earnings:
For those who write calls against shares owned in a long-term buy-and-hold portfolio to generate additional income, waiting until the report passes, rather than prior to the report, will allow for full share appreciation when there is a positive surprise. MSFT and FB should be great examples of this today after reports that beat consensus last night.
Alan
Ed,
That is really funny, thank you! That must have been hard to type :)? Some of us have shares of stock held for decades like company ESOP shares and while we don’t cover them during earnings holding them is the preferred course.
Now, I agree with you that if one is managing a traditional high turnover covered call portfolio where the stock itself is simply an immaterial vehicle to an end then, of course, sell it and move on every few months and pick a new one to avoiding earnings. – Jay
Jay,
ESOP.
Now that’s an acronym I haven’t seen in years.
I remember Louis Kelso starting the first US ESOP in 1956 in California. He and Mortimer Adler co-authored a book, “The Capitalist Manifesto”, in 1958.. Senator Russell Long, of Louisiana and son of Huey Long, created the legislation that preserved the tax status of ESOPs. Without Long they probably wouldn’t exist.
Haven’t heard much about them in recent years. Tried to find my copy of the book when I read your post but I guess I loaned it out or gave it away decades ago. A very good concept. Almost did it with one of my companies in the 80s but can’t remember why we didn’t go through with it.
Thanks for jogging the old memories.
Hoyt
Good morning Hoyt,
I probably did not use the term in a technically correct manner, I was using it broadly to describe any share of stock one may have gotten as a company match in their 401K plan.I still have the first share my employer gave me in the 80’s!
A pleasant weekend to all. – Jay
I have been writing covered calls for quite a while. Never bothered much with a formal exit strategy. But I would like to formally subscribe to this methodology. So… My covered calls are 1 month – 2 months – 3 months maybe up to 7 – 8 months. However the concept should be the same – 20% 10%…. First half of the contract period – 2nd half of the contract period. The question in my head is “at what point do I get back in on a recovery?” From what I gather here – Typically get back in at the same strike price, but at what premium?? Same premium? 50% or better of original premium? Jay? Alan? Anyone? ~Joe
Joe,
First let me respectfully ask you to consider avoiding long-term covered call positions that exposes us to multiple earnings reports (1 is too much). Also, by using Monthlys (or Weeklys) we have greater opportunities to re-evaluate our bullish assessment of the underlying.
That said, you are correct on the percentages. Re-selling the same option is only 1 of our potential choices. Selling a different option (rolling down) or selling the stock are other potential choices. Until we get to the last 2 weeks of a contract, we should view our positions as if we were in the first half of a Monthly contract.
Please review the exit strategy sections of my books and DVDs for details with specific examples of all possibilities.
Alan
Alan, It’s been a very long time since I’ve posted on your blog. That said, you are the reason I got into the options business. Your style, and clarity is what I needed and you provided many times over.
Respectfully, I understand your process and philosophy about 1 month covered calls. Most of the covered calls I write are on positions I want to hold. Some call that ‘overwriting’ my stocks. I typically go out to future months to gather enough premium to make it worth my while to enter the trade. I’m comfortable there.
Thank you for clarifying that regardless of the contract length, your thought is that the 10% should still apply to the final 2 weeks of the contract. I own one your ‘encyclopedia’ and will re-read the chapter on exit strategies. I will also post the results of following the exit strategies on the next few covered calls I open.
Best Regards, Joe