Weekly options (weeklys) are becoming an attractive choice for many covered call writers. These are options that expire every week rather than the more conventional monthly options. Weeklys are listed each week except that no new Weeklys are listed that would expire during the expiration week for regular options (the third Friday of each month), nor would they be listed if they would expire on the same date as a Quarterly option on the same underlying security. Other than SPX Weeklys (S&P 500 as the underlying security), closing times for Weeklys options match the closing times for regular, non-weeklys on the same underlying stock or ETF.
On Nov 15, 2013 U.S. options exchanges expanded the listing of weekly contracts from one expiration week to five straight weeks for a group of the most-actively traded options on stocks and exchange-traded funds. This known as the expanded weekly options program compared to the more well-known standard weekly option program. Most securities that appear on the BCI Premium Stock and ETF Reports are part of the expanded program. Both of our premium reports highlight which securities have weekly options associated with them.
The screenshot below shows a partial list of ETFs with weeklys as well as their participation in the standard and expanded programs:
ETFs with Weeklys
Note that EWJ is part of the standard weekly program but not of the expanded weekly program.
Advantages of Weeklys
- Annualized returns can be higher
- Can avoid exposure over weekends
- Can generate greater premium as earnings report dates are approached and trade up to the week before earnings
Disadvantages of Weeklys
- The pool of stocks with Weeklys is much smaller than those with Monthlys
- Management is much more time-consuming as “rolling” possibilities come up every week
- Less time for exit strategy execution (“hitting a double”, “mid-contract unwind” etc)
- Quadruple the number and amount of commissions
- Lower option liquidity
- Wider bid-ask spreads leading to less favorable price executions
There are many ways to make money in the stock market and using Weeklys may be appropriate for some investors. My personal preference is still Monthlys but encourage those interested in Weeklys to paper-trade with them to see which time frame leads to your greatest success.
Market tone:
In addition to the mostly bullish economic reports I am about to summarize, the fact that corporations can borrow money at ultra-low rates to buy back stock shares, should continue to enhance earnings per share stats for our equities. Also, due to stronger 2nd quarter GDP growth, it is not unreasonable to expect a stellar upcoming earnings season:
- According to the Labor Department, 288,000 jobs were added in June, well above the 210,000 expected
- Employment gains in April and May were revise upward by 29,000
- The unemployment rate came in at 6.1% in June from 6.3% in May and from 7.5% from a year ago. This @ a post-recession low
- The number of unemployed dropped by 325,000 to 9.5 million, a decline of 2.3 million from a year ago
- Factory orders fell by 0.5% in May, worse than the loss of 0.2% predicted by analysts mainly due to a drop of 30.8% in the defense sector
- There was a rise of 0.2% in non-defense orders in May
- Construction spending rose by 0.1% in May, below expectations of + 0.5%
- The ISM Manufacturing Index fell by 0.1 to 55.3 in June, but still depicting expansion. The new orders index rose to 58.9, the best level t
- his year
- The ISM Non-Manufacturing Index (service sector) dipped from 56.3 to 56 in June again still reflecting an expanding economic environment
- The US trade deficit declined 5.6% to $44.4 million in May
For the holiday-shortened week, the S&P 500 rose by 1.2%, for a year-to-date return of 8%, including dividends.
Summary:
IBD: Confirmed uptrend
BCI: Bullish, favoring out-of-the-money strikes 3-to-1
Wishing our entire BCI community a happy and safe holiday weekend,
Alan and the BCI team ([email protected])
www.thebluecollarinvestor.com
Premium Members,
The Weekly Report for 07-04-14 has been uploaded to the Premium Member website and is available for download. The data in this report is as of the market close on 07-03-14 due to the short market week.
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 BCI YouTube Channel link is:
http://www.youtube.com/user/BlueCollarInvestor
Best,
Barry and The BCI Team
Alan,
Do you ever write covered calls on lower priced stocks like the $5-$10 range? I would assume if not because of the volatility in them and the wild swings. From a percentage standpoint , if you are starting with a small account it would be the same but, I was curious to hear your thoughts.
Thanks,
Bryan
Bryan,
It’s not so much the price-per-share as much as the quality of the underlying security that is critical in the BCI methodology. That is determined by fundamental and technical analysis as well as common sense screening.
Stocks priced between $5 – $10 usually cannot pass these screens but some do. Of those that do pass, many do not have adequate options liquidity to justify a covered call trade.
So the bottom line is…it is rare to find an eligible cc writing candidate in the $5 – $10 price range but possible.
In a growing cc writing portfolio we can also consider using ETFs to get proper diversification and lower cash requirements. I use this approach in my mother’s account.
Alan
What is the source for the non IBD stocks on the various sections of the weekly premium report?
HS,
Over the years, the BCI team has developed a database of stocks that have historically been great cc candidates based specifically on the BCI screening process. The number of stocks in this database is > 3000. We screen these stocks along with the IBD 50 every week for our premium members.
Alan
Good Morning, Alan,
I hope all is well.
I have a question, and, while I know you’ve covered it before, I could use a refresher.
What do you do when you write an ITM or OTM call, and, early in the cycle, the stock takes off?
While I planned on a certain fixed profit, it’s painful watching the short delta increase as the stock runs up.
As always, your thoughts are appreciated.
Warm regards,
Tom
Tom,
This is my favorite type of “problem” to have. Firstly, it means that we currently are maxing our profits but also perhaps creating an opportunity for a 2nd income stream in the same month with the same cash.
As share price rises, the time value of the option will move towards zero. This means that it will cost less and less to close the entire position. Use the “unwind now” tab of the Elite version of the Ellman Calculator to determine % cost to close (a new feature just added). When we can generate a higher return in a new position than the % cost to close we unwind and begin that second income stream in the same month.
See pages 264 – 271 of the Complete Encyclopedia….for details on this mid-contract unwind exit strategy opportunity. It is also discussed in both DVD Programs.
Keep up the good work.
Alan
Alan,
I have done quite well in the past year with cash-covered put writing (OTM). I only sell puts on stocks that I would like to buy anyway and I like getting paid to wait for the stock price to drop. I realize that large drops in a stock price make this strategy more risky, but with the market trend lately and careful technical and fundamental screening, it’s been a winning play for me.
Your comments would be greatly appreciated (I realize it is outside the scope of BCI and would understand any reluctance to discuss it at length.)
Thanks.
Greg,
Selling cash-secured puts is actually the topic of my next book currently being (slowly) edited. I consider this also a great strategy like covered call writing but slightly less bullish. Most sellers of cash-secured puts will write OTM strikes as you do in hopes of capturing premium and not getting exercised. If exercised, covered calls can be written on the newly-acquired securities. I call this the P-C-P strategy or Put-Call-Put strategy.
Much like cc writing (and most other strategies) a put-seller must understand all the nuances of the strategy and have an appropriate series of exit strategies in place for position management.
The good news for all BCI members is that the very same stocks on our premium watch list that make great cc writing candidates also make excellent put-selling candidates. The screening process is precisely the same.
Alan
Upcoming live seminar in Arlington, Virginia: July 19th:
http://www.aaii.com/localchapters/pdfs/Washington%20DC%20Metro%20140719.pdf
Alan,
I have read cashing in on covered calls (3 or more times) and exit strategies numerous times. great books. my question is have you written anything on the other side of the trade–buying calls. is it covered in your encyclopedia of covered calls? Thanks for the most informative books on this subject matter.
Roland
Roland,
Thanks for your generous comments.
As you know from reading my first 2 books, I am a conservative investor and do not promote naked options trading although it may be appropriate for certain investors. The weekly stock and ETF Reports we produce for our members can also be used for buying calls and simply buying and selling stock although my greatest success has been with covered call writing.
The “Encyclopedia…” is my most comprehensive book and has been the number one selling covered call writing book on Amazon.com for 2 years since it was published. It does not address naked options trading but has a lot of new information including a few new strategies not addressed in my first two books.
I also have a book that is currently being edited on the topic of selling cash-secured puts.
Thanks for your interest.
Alan
Hi Alan, am interested in a Call on Google stock today for a 550% return on investment, the expiry date 25 July, can Google price reach 640 before or at that date of expiry in your experience, when the weekly range had not been that much(45 points) from current price!
Nico,
My guess is that you are looking at the at-the-money $605 call. Where does $640 come into play? Your obligation is to sell @ $605 if that is the strike you are considering. If not, the other strikes don’t seem to meet the ROI you mentioned.
Alan