Are SPACs reliable candidates for our covered call writing and put-selling portfolios? This article will define and explain the anatomy of a SPAC so we can decide if they deserve a place in our conservative option-selling portfolios.
SPAC defined
This is a company with no commercial operations (products or services) that is created to raise capital via an initial public offering (IPO) listed on the major stock exchanges. The goal is to locate a private company with outstanding growth potential. Once the target is established, the cash raised is used to merge with the IPO. Since there is no target company identified prior to the IPO establishment, SPACs are also referred to as blank check companies. The cash acquired from the IPO is placed in a trust and the SPAC has 2 years to locate a company. If no merger occurs after 2 years, the cash is returned to the investors. In many cases, the interest earned in the trust can be used as working capital by the SPAC. Investors receive units consisting of both common shares and warrants (rights to buy additional shares at a specific price).
Anatomy of a SPAC
- Sponsor (private equity firm, hedge fund etc.) completes an IPO
- Cash raised is placed in a trust
- Target company is located
- Shareholders vote yes or no
- If no, the SPAC is liquidated
- If yes, the SPAC acquires the company’s business model retaining the company name and changing the IPO ticker symbol
Examples of SPACS
Examples of SPACs in 2020
Discussion
SPACs offer investors the opportunity to get in on the ground floor of an emerging company but because of the unknown nature of the potential merger it represents a risky investment. Therefore, SPACS should only be considered by those with a high risk-tolerance. Investors are giving the sponsor team a blank check and then hoping for the best. If and when a merger does occur, we must take our time to evaluate the business model and its growth potential before using these securities for our option-selling underlyings.
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 ended 2020 with a net ROI of 34%. You were the initiator of that success.
Thank you,
Denis (Canada)
Upcoming events
1. Wealth365 Summit: Free webinar
Thursday April 22nd
10 AM ET
Topic: Portfolio Overwriting: Covered Call Writing Long-Term Buy-And-Hold Portfolios
2. How to Trade It Podcast
May: A link to the interview will posted on this site and in social media when provided to BCI
Interview with Casey Stubbs
The focus will be on “my story” and analysis of my go-to strategies
3. Mad Hedge Traders and Investors Summit
June 8th – June 10th
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.
****************************************************************************************************************
Hi Alan,
I just have a very simple question that perhaps would make a good topic for one of your Ask Alan videos.
What do you think of averaging down the cost basis when the trade goes against us? Does it make sense trying to save the trade by pouring more money into it (either buying more stock outright or selling puts) to bring down the cost basis in hopes that there will be a bounce that will allow us to exit at breakeven or with limited losses?
Or is it preferred to cut the losses and concentrate our buying power on new trades with different underlying stock?
Thank you.
Pavol
Pavol,
When share price declines, the value of those shares is what we should focus in on. If we own 100 shares of stock that went from $50.00 per-share to $40.00 per-share, we have $4000.00 worth of stock. We ask ourselves… where should we place that $4k? In the current stock or a new one? Framed differently… would I buy that stock today at the current price? We must take emotion out of the equation.
Now, to your question: Should we add more cash to a losing trade… usually no.
Averaging down by purchasing more shares is too risky.
However, we can implement our knowledge of stock options to average down without adding more money to the trade using the “stock repair strategy” Here is a link to an article I published on this topic which includes a link to our Stock Repair calculator:
https://www.thebluecollarinvestor.com/combing-covered-call-writing-and-the-stock-repair-strategy/
Alan
Pavol,
great question.
It is always tempting to buy more shares when your darling stock has gone down.
But as my father used to say: “Don’t throw good money after bad money.”
Roni
Alan,
What time of the month do you publish the Blue chip report? Is it always mid month, about two weeks before the first of the month? I do not see one for May, 2021 yet.
Additionally, the high dividend yield report is published. I see it out now for the 2nd quarter of 2021. How soon after the end of the quarter is that published?
Is the selling of 10 delta put strategy supposed to be for the dividend yield report or the blue chip report? Or is that left up to the individual investor?.
Thanks,
Wayne
Wayne,
The Blue Chip (Dow 30) Report is published the week of the monthly contract expiration… the week of the 3rd Friday of the month. This allows our members to prepare for the next monthly contract. For example, the Blue Chip report for the May contracts was published on this past Wednesday.
The High Dividend Yield report is published the last week of March, June, September and December.
The 10 Delta Put Strategy applies to our stock, ETF and Blue Chip Reports. We select a security that we wouldn’t mind owning and sell puts against those underlyings. I have had substantial success with this strategy since I developed it as a reaction to the COVID-19 crisis.
Alan
Alan:
How does the 10 Delta Put Strategy work? I think I used this strategy last fall for weekly put selling, but can’t find the methodology.
Thanks,
Pete
Pete,
Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/selling-deep-otm-cash-secured-puts-with-exit-strategy-enhancements/
Alan
Dr Alan
I would like to know how you would potentially handle the below hypo.
BCI trading at $58 on Mon following expiry Friday.
Buy/Write $60 OTM 1 month expiry for $2.80 20% BTC triggered 2 days later @ 0.56 due to Entire market has declined from fears of more covid, etc.
BCI had dropped to $48 on opening bell of 2nd day blowing past the 7% guideline by $5 Following day market flattens then starts climbing back.
Option 1: close BCI, taking hit of $775 x no. of contracts.
Option 2: only 2 days into monthly, so wait.
If option 2 selected – 2 weeks into monthly, BCI has not rebounded even though market has. Analyst’s has BCI range at $46 to $67. BCI has been bouncing between $47 to $50, so on 2nd week Friday $55 strike is selected for $0.75
Expiry Friday, BCI is back @ $48
E/R report due 1 week into next monthly. IV is 70%, so roughly I think around $8 up or down.
Option 1: Take hit of $700 x no. of contracts
Option 2: Look at protective collar. $45 put strike and $55/$60 CC 1 and 2 month. Negative return so not viable.
Option 3: BCI is a solid company of many years existence in the consumer discretionary sector, so Roll to next month $55 expiry for $1.60 or 2 month for $2.60
Option 4: BCI is a solid company of many years existence so hold thru E/R then set option.
Or..?
As I have greatly increased my option writing due to knowledge gleaned for your material, I am keenly interested in your thought process on the above scenario.
Humbly yours
Duane
Duane,
The initial decline is due to a total market decline so “waiting” after closing the short call is a reasonable approach.
Rolling-down to the out-of-the-money $55.00 strike is also reasonable but it seems to me that if share decline remained near $48.00, there may have been an opportunity to roll-down a 2nd time, perhaps to the $50.00 strike.
If we still have a bullish assumption on BCI and want to hold it through the upcoming report, a reasonable approach would be to purchase a protective put but not write the call option until after the report passes. This way, we have downside protection while retaining the opportunity to take advantage of a favorable report.
Alan
Alan,
I am VERY grateful that I found your book which aligned perfectly with my own investment ideals and provided a set of guidelines that greatly reduced my learning curve, thank you!
Using your guidelines I started with small conservative trades and gradually increased the size and potential return of my trades. I feel like I have a pretty good grasp of equity selection and strike selection but I’m struggling with position management. For the April contracts I had 10 positions almost entirely in or at the money with a potential return of 3.38%. Of those 10 positions 6 earned max returns and 4 were close to break even and triggered the 10% rule in the last days of the contract. Of those 4 one lost a significant amount and 3 had small gains. For the month I ended up with a 1.58% return, I’m sure that I could have improved upon that with better position management.
My question is, should I cancel the 10% BTC orders during the last days of the contract thereby saving the expense of buying back the option then wait until after expiration to sell the stock or write the next months contract? I would be glad to share the my Ellman Calculator for the April trades for you to review.
Thanks
Troy
Troy,
Thanks for your generous comments.
I generally leave the 10% guideline BTC limit orders in place in the last day or two of a contract. It’s okay to remove them if our positions can be carefully monitored during that time-frame.
I have been able to execute exit strategies as late as the last day of a contract as shown in the screenshot below when I rolled-down with XLE this past Friday with a few hours remaining until contract expiration.
The maneuver generated an additional $44.00 into this particular portfolio, not a windfall but these exit strategy credits do add up to significant returns over time.
If you have a trade of particular interest, send it over to me and perhaps I will use it in a blog article or “Ask Alan” video.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
Madoff is dead, here comes SPAC.
Roni
Roni,
Madoff’s Ponzi scheme was based on a covered call writing-like strategy he called the “split strike conversion strategy” We know it as the “collar strategy”
He pretended to use the collar strategy. How ironic that he actually could have made money for his victims had he actually implemented the strategy. Our BCI community could have helped him! A tragedy for so many that could have been avoided.
Alan
Roni and Allan,
We never know what happens to people’s minds. Madoff was one of the most brilliant minds on Wall Street. As you said, Alan, he could have run a very successful fund and made a lot of money for a lot of folks. Instead he scammed so many people and institutions that help so many people. I once saw a list of all the victims. It was astonishing.
Hoyt
Hoyt,
There was a report some time ago that stated that a large amount of Madoff-related losses was recovered by suing the large banks who backed him.
Roni
Alan,
Sorry for the late reply; I was swamped trying to replace my CC monthlies during the last two red days. Today I am still only 50% invested.
I agree with you, but I believe Madoff wanted to get rich fast and was unfortunately just a crook.
Roni
Hello Alan,
Thank you for sharing your set-up formula for Poor Man’s Covered Calls! Discovering that made a *significant* profit-saving shift in my strategy (I am still researching prior to executing my first PMCC). Again – thank you.
Question / Scenario:
As I am planning my PMCC – I have been considering how to use the premium I receive, and I would like to reinvest it to grow the PMCC I am looking at.
Given that the LEAPS cost will change as the stock goes up or down, how does that affect the PMCC formula you use?
If I buy a LEAPS contract that cost $10 this month, and then buy the same LEAPS contract next month at $11 – and sell Covered Calls against both of them – how is your PMCC formula calculated?
All the best,
Justin
Justin,
For each PMCC trade we execute, the initial structuring formula remains the same:
[(Difference between the strikes) + initial short call premium] > Cost of LEAPS
Use the 1st tab of the BCI PMCC Calculator to ensure that the required formula is met.
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 04/16/21.
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
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
Since we are at the beginning of 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,
Thank you first for the free content you deliver to us regularly.
I am particularly interested in selling secured put options and one of your books describes in detail the methodology.
I am particularly interested how to “repair” a trade when he goes wrong. Do you explain your approach on this subject in the book on in an other book you can recommend to me.
My second question is how we can find such stocks … I have followed your courses for beginners and it is possible to create under “finviz.com” a screener with the criteria you proposed but it is for covered call. Will it be possible to create a similar screener for cash secured put.
Thank you by advance for your time to answer me.
Jean
Jean,
Every resource created by BCI will have a position management section. It is one of the 3-required skills for option-selling. Here are links of interest:
Best book:
https://www.thebluecollarinvestor.com/alan-ellmans-selling-cash-secured-puts/
Best online video course:
https://thebluecollarinvestor.com/minimembership/selling-cash-secured-puts-basic-and-advanced-principles-2-part-dvd-series-workbook/
Best calculator:
https://thebluecollarinvestor.com/minimembership/calculator-elite-plus-calculator/
Screening stocks and ETFs for selling cash-secured puts is precisely the same when we screen for covered call writing. The watch lists for both strategies are the same. The lists we provide to our premium members should be used for both strategies. If you are using a free screening service the same applies.
Alan
Hi Alan,
Let me tell you that I learned more about options from your books and DVD then from lots of gurus who have the best secret program,
I was wondering if one is retired and have time to watch a stock during trading hours ,and sell the call at the high of the day by following a 3 day moving average on a 5 minute chart wouldn’t that be beneficial to the seller ,you get higher premium for the option, and you maybe able to increase the strick price.
Your opinion is highly appreciated.
Regards,
Raymond
Raymond,
Thank you for your generous remarks.
The best way to enter a covered call trade is to make sure the initial time-value return goal range is satisfied and then we pull the trigger.
I have concern about buying a stock then waiting to time the sale of the option based on technical analysis which may or may not end up improving our initial return. If the “deal” is there, take it.
I prefer entering my option-selling trades between the hours of 11 AM ET and 3 PM ET to avoid early morning and late afternoon volatility related to computerized institutional trading.
What a great activity to integrate into a quality retirement lifestyle!
Alan
Hi Alan
I see how wise you are
Experience is the best teacher
Thanks,
Raymond
Premium Members,
In the new report dated 04/16/21, there is an error with the stock “WSM”. While the entry shows that the stock failed the technical indicator screen correctly, it was not moved down to the “pink” (…Failed This Week…) area. As of the close on Friday, it does not meet our criteria. The report will be updated, uploaded, and an email will be sent out later this evening.
Denis, thank you for spotting the problem.
Best,
Barry and the Blue Collar Investor Team
Premium Members,
The Weekly Report has been revised and uploaded. In the report dated 04/16/21, there was an error with the stock “WSM”. While the entry correctly shows that the stock failed the technical indicator screen, it was not moved down to the “pink” (…Failed This Week…) area. As of the close on Friday, it did not meet our criteria. This been revised in the updated report dated 04/16/21-RevA.
Best,
Barry and The Blue Collar Investor Team
Hi Alan,
I have a question regarding what your thoughts are for initiating a position, would you jump right in with the covered call strategy or with cash secured puts. This is for an income strategy.
I did by your books, great resource!
thanks Jeff
Jeff,
If an investor is starting out with options, I would focus in on covered call writing as it is more intuitive and easier to master than selling cash-secured puts. Once covered call writing is mastered, learning put-selling becomes much easier.
Mastering both strategies has the benefit of using the PCP (put-call-put) strategy where we use put-selling to enter a covered call trade, a strategy I love in bear and volatile market environments.
Alan
Alan,
I thank you for your books on cash-secured puts and covered calls. They have made me a much better option trader.
I would like to find a way to identify a true breakeven on a put trade. Here’s an hypothetical example: on 3/11/21 XYZ is selling for $100. I write a 95 3/19/21 put for a $1.00 premium making my breakeven $94.
XYZ drops to $94 2 days before expiration. But when I try to buy back my put it’s $1.50. So in this case my breakeven is $93.50.
Is there a formula that will estimate a true breakeven when you initiate a trade?
Thanks,
Rudy
Rudy,
The BE formula remains the same: (Put strike – put premium) = BE
This will let us know that, if the put is exercised, the current stock price that results in neither a gain or a loss.
For example, if the $95.00 put is exercised and current market value is $94.50, we have an unrealized gain of $0.50 per-share.
If the current market value after exercise is $93.00, we have an unrealized loss of $1.00 per-share. In both cases, the original BE remains $94.00.
If we close the short put, the BE is the original put premium, in this case $1.00.
Bottom line: The BE price in the Elite-Plus and BCI Put Selling Calculators relate to the stock price if the option is exercised.
Alan
Alan,
If I allow my put to be exercised and having decided to accept the stock at a discount which is great, I will now move on to selling a covered call.
If the actual price has fallen below the ‘break-even’ price,as follows:
Strike = 93.50
Break even = 92.84
Current price = 90.60
Would it make sense to write a covered call say with a strike price of 93:50 or later? That way I would earn some more premium and hit my original strike price should the stock end above the new strike?
Do you adopt any particular strategy here?
Thanks,
Lindsay
Lindsay,
If our short put is exercised, the current market value of the stock or ETF can be above or below the previous BE price. In this scenario it is below the previous trade’s BE.
Whether the price is higher or lower than the put trade BE, we manage our covered call trades as if there was no previous put trade. Previous stats should not influence how we manage our trades today.
Our covered call trades will be based on initial time-value return goal range and our “moneyness” strike decisions where OTM is more bullish than ITM strikes. These decisions are based on current market value, $90.60, in this hypothetical.
Let me give another (exaggerated) example: Let’s say we bought a stock a year ago at $50.00 and today it is trading at $75.00. Our covered call writing decisions are based on a stock price of $75.00, not $50.00. Same thing if the original price was $75.00 and current price is $50.00… our decisions are based on a $50.00 price.
It is important not to allow previous stats influence our trading decisions today.
Alan
Thank you Alan, really appreciate the feedback and wisdom
Hi Alan,
I’m new to the site and need to understand when choosing strike and expiration for both selling CALL and PUT.
Should I pick an at-the-money strike for both selling CALL and PUT?
And the expiration should be 45 days?
Thanks,
Tri
Tri,
Strike selection is the 2nd of the 3-required skills essential for elite option-selling. It is based on multiple factors and may vary from trade-to-trade. All my books and video courses have substantial sections on strike price selection. Here are links to 2 of the dozens of articles I’ve published on this topic.
https://www.thebluecollarinvestor.com/strike-price-selection-when-selling-cash-secured-puts-a-real-life-example-with-wwe/
https://www.thebluecollarinvestor.com/selecting-a-specific-strike-price-for-our-covered-call-positions/
My preference is to use monthly expirations, expiring on the 3rd Friday of the month. Weekly options, expiring every Friday at 4 PM ET work as well. I will rarely go our further than 1-month.
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.
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
Barry,
I got a message from Hoyt; BLDR announced ER for 05/29/21.
I checked on Google and confirmed it.
Roni
Hi Roni,
ER dates are the most difficult item in our report to accurately identify. They frequently change from the various sources that we use to get our data from, as well as differing from different data sources. When it comes to definite Earnings Report dates, until the company has a press release confirming the date, any other published date is considered an estimate at best. Consider dates for BLDR:
– Earnings Whispers: 05/28/21
– Schwab: 04/29/21 with the note: “The date was gathered by Wall Street Horizon, but it is still considered tentative.”
– Yahoo: 04/28/21 to 05/03/21
– Market Beat: 4/29/2021 (Estimated)
– BLDR company website: No Press Release announcing ER date as of 3:30 PM EDT today
As you know, I check the ER date for every stock in our report every week (as of the Friday close). Until there is a company press release, Earnings Whispers has been our most reliable source of ER Data…they indicate when an ER date is confirmed.
I will be reviewing ER dates tomorrow night and will publish the most current data that I find.
Best,
Barry
Barry,
I understand it perfectly, and I always trusted Earnings Whispers forecasts as if it was the Holy Bible.
But now I lost faith.
MTZ was exactly the same. EW showed 05/28 and now confirmed 05/06.
I liquidated MTZ this morning with a 1% gain, very good for a 3 days trade.
I bought back my BLDR CC with a small gain but will hold the shares hoping that it will continue to rise until the report.
Waiting for your new list on Sunday – Roni
Correction: Sorry, I mean ER showed 05/28 and not EW.
Hi Roni,
Of all of the metrics that we provide in our reports, ER Dates are the most troublesome. I’ve been preparing the BCI Weekly Reports every week since 2009. In all that time, I’ve used just about every available source for ER Report dates and Earnings Whispers has been the “best”…even with their occasional inconsistencies’. There have been times over the years when I went to 6 different places and got 5 different answers…really!
Please rest assured that I make every effort to find the correct ER Date every week. The good news is that the BCI Community helps out when there is a mid-week date change.
Stay safe,
Barry
Hi Roni,
Of all of the metrics that we provide in our reports, ER Dates are the most troublesome. I’ve been preparing the BCI Weekly Reports every week since 2009. In all that time, I’ve used just about every available source for ER Report dates and Earnings Whispers has been the “best”…even with the occasional inconsistencies’. There have been times over the years when I went to 6 different places and got 5 different answers!
Please rest assured that I make every effort to find the correct ER Date every week. The good news is that the BCi Community helps out when there is a mid-week date change.
Stay safe,
Barry
Roni,
To prove my point on the problem with ER Dates, BLDR just confirmed their ER Date as 05/06/21…totally different from the dates in my post from 4/22/21 at 3:30 PM EDT!!!
I confirmed with both Earnings Whispers and the BLDR website.
Best,
Barry
Thanks, Barry,
I appreciate all the hard work you do for us each week, and I will continue to follow all your suggestions.
The good thing about the BCI methodology is the exit strategy. As you can see in my post, I did gain 1% in 3 days on my MTZ unwind trade, and I can still break even or gain on my BLDR shares.
Have a great weekend – Roni