Covered call writing and selling cash-secured puts are low-risk option-selling strategies that lower our cost-basis and generate cash-flow as we seek to beat the market on a consistent basis. By integrating both strategies, we construct a multi-tiered option-selling strategy which will both generate significant cash-flow plus offer substantial downside protection. In our BCI community, we refer to this strategy as the Put-Call-Put or PCP strategy. Outside our community, it is sometimes referred to as the wheel strategy. This article will highlight how The PCP strategy can result in huge downside protection over a 2-month timeframe using T-Mobile US, Inc. (Nasdaq: TMUS).
What is the PCP strategy?
An out-of-the-money (OTM) cash-secured put is sold and, if exercised, we write an in-the-money (ITM) or out-of-the-money covered call. Here is a graphic representation of the strategy:
The Put-Call-Put (PCP) Strategy
The initial put sale on 4/7/2020 with TMUS trading at $86.09 (5-week return)
TMUS Put Option-Chain
The OTM $82.50 put strike shows a bid price of $2.91. This premium can probably be negotiated higher, leveraging the Show or Fill Rule, but we will use the published bid price.
Put leg of the PCP trade
TMUS: Initial Put Trade Calculations
- Initial 5-week time-value return of 3.66%
- If exercised, shares are purchased at a 7.55% discount
- The breakeven price point is $79.59
Covered call leg of PCP trade
TMUS: OTM and ITM Covered Call Writing Calculations
- The OTM covered call generated an initial 5-week return of 2.90% with an additional 3.70% of upside potential
- The ITM covered call generated an initial 5-week time-value return of 2.80% with 2.60% downside protection of that time-value profit
- The ITM call strike resulted in a 5.2% protection to the breakeven price point
Downside protection of steroids (12.75% over 2-months (7.55% + 5.2%)
TMUS: Total 5-Week Downside Protection
In this real-life example, the stock price would have to drop more than 12.75% over 2 months before a penny is lost.
Discussion
Covered call writing and selling cash-secured puts lower our cost-basis and provide protection to the downside. By combining the 2 strategies into the PCP strategy, we can create huge downside protection or downside protection on steroids.
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 really do get a lot from your service. I have learned how to make measured moves and have tracked trades and balances and see where my previous performance has improved since I have incorporated using BCI. I am very grateful. And, believe me, I have spent $$$ on other services that did not impact my trading with noted positive results. Again, incredibly grateful.
Very Happy BCI User,
Michelle
Upcoming events
1. Mad Hedge Investor Summit
June 15th, 2022
12 PM ET – 1 PM ET
Covered Call Writing Dividend Stocks to Create a 3-Income Strategy
Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI Managing Director
Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash-flow. By mastering the skill of strike price selection and adding dividend distributions, a potential 3-income strategy can be crafted with a goal of beating the market on a consistent basis.
Topics covered in this webinar include:
- Strategy analysis
- Option basics
- What is covered call writing?
- Dividend distribution
- Stock selection
- Option selection
- Trade management
Real-life examples will be highlighted with Dow 30 stocks using option-chains and calculation spreadsheets. Attendees will have the opportunity to participate in written Q&A during the entire webinar.
2.American Association of Individual Investors: Greensboro North Carolina Chapter
Saturday June 18, 2022
10 AM – 12 PM ET
The PCP (put-call-put or wheel) Strategy
Using both covered call writing and selling cash-secured in a multi-tiered low-risk option-selling strategy where we either generate cash-flow or buy a stock at a discount.
Zoom webinar for Chapter members
3. Money Show Orlando live event
October 30th – November 1st, 2022
OMNI ORLANDO RESORT AT CHAMPIONSGATE
Visit Alan, Barry and members of the BCI team at Booth # 415
Masters Class
Comprehensive Course on Selling Cash-Secured Puts
Detailed start-to-finish 6-part program
This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:
- Section I:
- Option basics
- Section II
- Traditional put-selling
- Section III
- PCP (wheel) strategy
- Section IV
- Buy a stock at a discount instead of a limit order
- Section V
- Ultra-low-risk put/Delta strategy
- Section VI
- Ultra-low-risk put/Implied volatility strategy
This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.
45-minute presentation
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
Registration link and more details to follow.
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
****************************************************************************************************************
Alan,
In a non tax acct does it make sense to sell ATM Calls on an owned stock and then, if called, sell a put at a slightly lower strike price, and if assigned, start the process all over again?
Best,
JP
JP,
Using the PCP (put-call-put or “wheel”) strategy is definitely one of the appropriate strategies for sheltered accounts. I would consider tweaking the approach presentation as follows:
1. Base the call strike on overall market assessment, chart technicals and return goal range, not always an ATM strike.
2. I almost always do use OTM put strikes, but the placement (amount OTM) is based on the above factors as well. Consider going deeper OTM if a more defensive approach is indicated.
3. Take advantage of the fact that we can reassess our bullish assumptions on the underlying securities. Since there will be no tax penalties if the underlyings are sold, we may decide to move to another stock or ETF.
Bottom line: The PCP strategy is an outstanding strategy approach for both sheltered and non-sheltered option accounts. If our underlying securities are in a long-term buy-and-hold portfolio with potential negative tax consequences, we turn to ‘portfolio overwriting”
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 06/03/22.
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
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
In your newsletter today you mention the P-C-P strategy. I understand the initial cash secured put and buying the underlying if assigned. This is followed by selling a call on the underlying.
But then are you selling a put or BUYING a put for further protection?
Thanks,
Michael
Michael,
PCP is all about selling call and put options and buying shares if the put option is exercised. See the graphic below. Buying a protective put is a different strategy known as the “collar strategy”.
Here are the steps:
1. Sell OTM put(s)
2. If exercised, shares are purchased at a discount from the initial price of the stock when the put option(s) were sold.
3. Write covered calls (ITM, ATM or OTM depending on market assessment, chart technicals and initial time value return goal range) on the newly acquired shares.
4. If calls are exercised, shares are sold at the agreed upon sales (strike) price and the cash is then used to secure another put sale.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
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
Good morning Dr. Alan,
I have been selling calls on DVN energy for some time.
The last time it paid a dividend, my sold call was ITM the
day before ex dividend, and my shares got called.
I currently have calls expiring on 6/17/22 which initially
were OTM but with stock appreciation are now ITM.
DVN ex dividend date is this Friday and I am wondering
if it is likely I will have my shares called again even though
expiration is a week away?
Another unrelated question regarding selling ITM calls:
I have always sold OTM calls but this last cycle have
added a few ITM calls. I picked the stocks off the
Blue Collar stock sheet (what a wonderful resource).
With ITM sold calls does one do calculations for
early unwind or typically just let these go to
expiration date (6/17/22)?
I appreciate all of your help!
Thank you,
Todd
Todd,
1. Early exercise to capture dividends is typically due to investor error so it is unlikely but possible as you previously discovered. It is more likely when the strike is ITM, the ex-date is close to the expiration date and the time-value component of the option is < than the future dividend distribution. In this case with DVN, we have the first 2 boxes checked. Check out the time-value versus the dividend amount and see if that box is checked as well. If yes, early exercise today (the day prior to the ex-date) is more likely, but still rare. 2. When a strike (ITM or OTM initially) moves deep ITM, we check mid-contract unwind (MCU) opportunities even towards the end of a contract but usually in the first half of a contract: https://www.thebluecollarinvestor.com/mid-contract-unwind-exit-strategy-at-the-end-of-a-contract/
If MCU is not a positive choice for us and the strike is still ITM as we approach expiration Friday, we evaluate rolling-out or out-and-up opportunities.
Alan