Populating our covered call writing and put-selling monthly portfolios during earnings season can be challenging as we seek to avoid companies about to report earnings. This is the most important rule in the BCI methodology. All other parameters are simply guidelines. Most companies report quarterly earnings in January, April, July, and October. These impact the monthly contract expirations for the February, May, August, and November contracts.
There are several approaches we can implement to mitigate these quarterly event hurdles:
- Use stocks that don’t report in a particular option monthly expiration cycle (there will always be several, but limited, choices).
- Use exchange-traded funds (ETFs) which do not report earnings as an entire security.
- Use stocks that have weekly options associated with them and avoid the week of the earnings report. This last approach is the topic of this article.
BCI Premium Stock Report prior to the August 2023 monthly expiration contracts focusing in on RNG (Reports earnings on 8/1/2023)
- RNG has weekly options (red circle)
- Report shows a high beta of 2.32, more than double the historical implied volatility of the S&P 500. It also shows a forward-looking implied volatility of 42.4, almost quadruple that of the S&P 500 (11.00) at the time this screenshot was created. We are expecting significant premium returns if we can also tolerate the downside risk.
Weekly expirations for the August 2023 monthly contracts
- 7/28/2023
- 8/4/2023 (no option sold this week)
- 8/11/2023
- 8/18/2023
RNG option-chain for the weekly expiration on 7/28/2023
- With RNG trading at $42.92, we will look at the $45.00 out-of-the-money call strike.
- The option-chain shows a bid price of $0.55, with a favorable bid-ask spread of $0.05 and adequate open interest of 160 contracts.
RNG weekly calculations using the BCI Trade Management Calculator (TMC)
- The high implied volatility of RNG has generated an initial time-value return of 1.28%, 58.47% annualized (brown cells).
- This annualized return is reduced by 25% since we are using only 3 of the 4 weeks in the August contracts, thereby generating an annualized return of 43.85%.
- These are initial returns. Final returns can be higher or lower, but this is our starting point.
- The breakeven price point is $42.37 (yellow cell).
- There is an upside potential of an additional 4.85% if RNG moves from its current market value ($42.92) up to the $45.00 strike (purple cell).
Discussion
The BCI rule of avoiding earnings reports makes earnings season challenging in terms of populating our covered call writing and put-selling portfolios 4 times per calendar year. We can mitigate this issue by using securities that do not report in that specific monthly contract cycle, using ETFs and focusing in on stocks that have weekly options.
The Poor Man’s Covered Call Online Video Course with Downloadable Workbook
Covered call writing is a cash-generating strategy that lowers our cost basis thereby improving our opportunities for successful investments. It involves a long stock position (we buy the stock) and a short option position (we sell the call option). The PMCC strategy replaces the long stock positions with long call positions, typically deep in-the-money long-term expiration options known as LEAPS. Because long options cost less than stocks, we are investing less money and the return on our capital increases. As with all strategies, there are pros and cons that must be mastered to determine if this is a proper strategy for our personal risk-tolerance and return goals. This program will highlight in detail:
- PMCC definition
- Pros and Cons
- Risk/reward profile
- Best stocks and ETFs to consider
- How to construct a PMCC trade
- Hypothetical example
- Multiple real-life examples
- The BCI PMCC Calculator
- Option Greeks
- Position management
- Rolling LEAPS
Click here for more information and a video.
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,
Words to describe trade management calculator: perfect, simple to use, and powerful . It’s exactly what I needed to focus 100% on the BCI system.
I vow to learn excel more and automate reports for this amazing spreadsheet.
Thanks Alan.
Slowly I am obtaining all your resources ….
John
Upcoming events
1. BCI-Only Webinar: Portfolio Overwriting
Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”. Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
Topics discussed
- Brief review of covered call writing
- Option basics
- What is an option-chain?
- Option selection
- Calculating covered call returns: Real-Life examples
- Portfolio overwriting defined
- Pros and cons of portfolio overwriting
- Why early exercise is so rare
- Rolling options
- Role of dividends
- Locating ex-dividend dates
- How to avoid early exercise
- Real-life examples with calculations
- BCI Portfolio Overwriting Calculator
- BCI Trade Management Calculator
- Summary
Details & registration link to follow.
2. Long Island Stock Traders Meetup Group (private investment club- Part I)
Thursday February 15, 2024
7:30 PM ET – 9:00 PM ET.
Club members only.
3. Las Vegas Money Show & Stock Traders Live In-Person Event
February 22 & 23, 2024
Paris Hotel
Thursday, February 22, 2024, at 4:55 pm – 5:25 pm PST
The PCP (put-call-put or “wheel”) strategy
Friday, February 23, 2024, at 12:00 pm – 12:45 pm PST
Covered Call Writing: A Streamlined Approach
4. Long Island Stock Traders Meetup Group (private investment club- Part II)
Thursday March 14, 2024
7:30 PM ET – 9 PM ET
Club members only
Hi Alan.
Just received the book. Wow. Looks like a lot of information.
One quick question as I start reading –
Covered calls are supposed to be a good strategy to generate income from a portfolio.
To me, it seems like it won’t work that well if the stock is rising and you want to retain the shares because it will cost you more to close the position than you received in initial premium.
I know this is simplistic, but am I missing something obvious?
Thanks.
Pete
Pete,
The strategy you are referencing is known as “Portfolio Overwriting”, where we seek to generate additional cash flow on long-term buy-and-hold stocks we do not want to sell.
This is a covered call writing-like strategy, not traditional covered call writing and must be structured differently than standard call writing.
We always use out-of-the-money call options and seek lower returns than traditional covered call writing.
Our strike selection guidance can include the use of Delta, implied volatility and/or initial time-value returns goal ranges.
Here is a link to one of the many articles I published on this topic:
https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/
Here is a link to an online video course on the subject:
https://thebluecollarinvestor.com/minimembership/video-portfolio-overwriting/
Here is a link to a book that includes portfolio overwriting:
https://thebluecollarinvestor.com/minimembership/covered-call-writing-alernative-strategies/
Alan
Hi Again Alan,
I have purchased your Exit Strategies book and can’t wrap my head around a certain scenario. On page 45 of your book, you walk through rolling out and up in-the-money when at or near expiration Friday.
This situation happens to me quite a bit, where I sell an option with a strike price at say, $80 and the stock price goes above it- to say $86. I struggle with how to handle it. Ideally, I’d like to “Portfolio Overwrite” as you nicely coined and not have my shares called away.
Anyway, with the scenario on page 45 of the book (rolling out and up in-the-money when at or near expiration Friday), there is a net loss when buying back the original option and selling to open the new option. Then there is the “bought up” value which is included as part of the return.
The part I can’t wrap my head around is what happens if this exact scenario plays out every month for out for an entire year. Yes, there is the bought-up value, but it just seems like I would be “paying” to own the stock and trade options on it and I would have been better off to just own the stock outright and not sell options on it.
I know I am missing something and it’s driving me crazy. If you could set me straight I sure would appreciate it! 🙂
As always, thanks for everything you do!
Dave
David,
Before I analyze the math from page 45 of my 1st book on exit strategies, it is important that we state our strategy goals prior to executing any trade.
In the book, we are referencing traditional covered call writing, but you are interested in “portfolio overwriting”, a covered call writing-like strategy.
The trade structuring will differ between these 2 approaches. For portfolio overwriting, we use deep out-of-the-money strikes and target lower returns, to protect against strikes expiring in-the-money, as it did in this example. The need for rolling will become much less necessary. In the example on page 45, the original stock is purchased at $78.00, and the $80.00 call was sold. For portfolio overwriting, we would use a much higher strike to avoid the need for rolling.
That said, here’s the scenario:
Buy 100 x XYZ a878.00 and sell the September $80.00 call.
At expiration, the stock is trading at $86.00 (shares can only be worth $80.00 with the original call strike in place).
BTC the $80.00 call at $6.10 ($6.00 intrinsic-value & $0.10 time-value).
STO the October $85.00 call at $4.20.
With XYZ trading at $86.00, and the $85.00 call in place, share value has moved up from $80.00 to $85.00, an unrealized gain of $5.00.
We have a net loss of $1.90 on the option side ($6.10 – $4.20), and an unrealized stock gain of $5.00, for an unrealized net gain of $3.10, or 3.9%, 47% annualized. This is the starting point after rolling out-and-up to an in-the-money strike.
We also have downside protection of that 3.9% of 1.3% ($1.00/$80.00).
Bottom line: If we are factoring in the intrinsic-value of the buy-to-close premium, we must also factor in the unrealized share appreciation resulting from removing the original strike.
Also (very important), we must identify the strategy we are using and what are goals are (keep stock?), before structuring our trades. This way we won’t run into the scenario where each month we are required to roll the option in order to retain the shares.
BTW: Here’s a link to my latest and best book on exit strategies:
https://thebluecollarinvestor.com/minimembership/softcover-exit-strategies-for-covered-call-writing-and-selling-cash-secured-puts/
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 12/08/23.
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
Alan,
I’ve got a question on a PMCC.
On 3/24/23 bought (1) 01/19/24 $150.00 call for $23.55.
I didn’t run the PMCC calculator at the time. Didn’t know it existed.
Sold calls almost every month since the purchase. It’s done fine. premiums have been ok. It’s been a good learning experience.
My question is, my 150 covered call will expire in a little while. should I look to roll it out or should I just take the gain and sell the 150.00 call?
Thanks for the reply.
You guys have been awesome about returning my questions.
Brad
Brad,
If we are still bullish on the underlying security, we roll the LEAPS 1 or 2 years (my preference) out.
A useful guideline is to roll approximately 90 days prior to contract expiration. This relates to Theta (time-value erosion) and the amount we will receive when selling the long call.
Alan
Premium Members,
There was an error in the ER Date for the stock CLS. The correct date is 01/24/24. An updated report has been uploaded to the Premium Member website. look for the report dated
12/08/23-RevA.
Best,
Barry and The Blue Collar Investor Team
Alan,
Thank you for your responses Alan!
I’m wondering if I should just allocate a portion of my funds to follow the strategy and goals you follow in your books and use the proceeds to buy more shares of the portfolio I’m trying to overwrite and not bother trying the overwriting thing anymore.
I have been writing calls very far out of the money (using your 84% rule based on IV), yet still seem to have to roll the calls too frequently because the price rises above the strike. Perhaps I need to hone my technical analysis skills. Seems I’m always stressing that I’m going to lose my shares.
Anyway, thanks so much for your advice. I really appreciate it!
Dave
Dave,
If we are trading in non-sheltered accounts, with securities of a low cost-basis, “losing” our shares can result in negative capital gains tax scenarios. This when we would favor “portfolio overwriting”.
If not, we shouldn’t stress over losing shares, especially after generating option premium + significant share appreciation when writing deep OTM calls. Rolling will depend on the calculations resulting from using this exit strategy.
We can craft our option-selling portfolios to achieve the goals specific to each investor. I favor traditional covered call writing and selling cash-secured puts. This approach may or may not be appropriate for others.
Alan
Alan:
I hold number of ETF positions on which I sell very conservative OTM Calls, as, for various reasons, I want to avoid any Calls.
However, sometimes as the Expiration dates draw near, the market ramps up abruptly, & I must deal with the prospect of having them called away. My question concerns the best strategy to employ to avoid that.
It appears my choices are:
1. Simply roll out the Call to the next contract period at the current Strike & see what happens to the price. Of course if the market continues to go up, this puts the position even deeper ITM.
2. Roll the Call out to the Strike I usually would determine based on Implied Volatility & Trade Return Objectives. Of course this likely requires additional investment cash.
3. Roll out to some intermediate Strike, such as the current price of the holding.
I would very much appreciate your comments on this.
And, as always, I thank you in advance for considering my question & for continuing to provide a most helpful & informative resource to all of us who trade options.
Paul
Paul,
The strategy you are using is “portfolio overwriting”, where we seek to generate cash-flow leveraging securities we do not want to sell.
We can use Delta, implied volatility (IV) and/o modest initial time-value return goal ranges to guide us to the deep out-of-the-money strikes required for this strategy approach. The annualized initial time-value goal range is typically between 4% – 8%, much lower than the range we would use for traditional covered call writing.
If the strike is expiring in-the-money, we would roll the option, prior to 4 PM ET on expiration Friday. You are 100% correct that would need to set aside cash in our portfolios to take advantage of these exit strategy opportunities. 2% – 4% of our total portfolio cash value is a good guideline.
If a stock price is accelerating exponentially and if the market has a bullish tone, we can opt to roll-out-and-up. Although the intrinsic-value component of the cost-to-close may be high, the time-value will be quite low, and there will be an unrealized share price credit that must be factored in.
Bottom line: Start with high probability of success trades, using deep OTM calls based on Delta, IV and/or a low, but still significant, annualized return and be prepared to roll the options, if needed.
Alan
Premium members,
The new Blue Chip Report for the best-performing Dow 30 stocks has been uploaded to your member site.
Login and scroll down on the right side to “B” and look for the report for the January 2024 contracts.
Alan & the BCI team
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