Comments on: When is it Appropriate to Use Covered Call Writing? A New Perspective https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/ Learn how to invest by selling stock options. Tue, 17 May 2016 12:05:03 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/#comment-45251 Tue, 17 May 2016 12:05:03 +0000 http://www.thebluecollarinvestor.com/?p=13775#comment-45251 In reply to Adrian.

Adrian,

Yes correct, stats based on initial returns.

Alan

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By: Adrian https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/#comment-45202 Tue, 17 May 2016 06:21:30 +0000 http://www.thebluecollarinvestor.com/?p=13775#comment-45202 Thanks Alan I have seen the answers and they were how I expected them to be.
I will presume that your answer of ‘1% over and above the profit generated'(Qu.1), was meaning for the remaining 2 week timeframe(so based on a 2% for the month), I am sure that’s right? Thanks

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By: Alan Ellman https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/#comment-45026 Mon, 16 May 2016 11:21:28 +0000 http://www.thebluecollarinvestor.com/?p=13775#comment-45026 In reply to Alan Ellman.

Adrian,

3- Normal to bull market environments are ideal for us. In many cases we generate 2 income streams for our trades, one from option premium and the other from share appreciation from current market value to the out-of-the-money strike. You are referencing scenarios when share appreciation is greater than those 2 income streams combined. It happens and this is, in fact, the main disadvantage of covered call writing but overall (in my humble opinion) the advantages far outweigh the disadvantages. Now, if we had a “raging” bull market and all positions are appreciating exponentially, then just buy the shares or write way out-of-the-money strikes. But that’s not the norm so we continue to hit singles and doubles in most market environments. Maximizing our trade returns is a positive!

4- I have beaten the S&P 500 every year for over 2 decades. The amount depends on our personal risk tolerance and how we invest. More aggressive investors will have loftier goals. For this reason, I can’t give a specific percentage but I will say that in most years we should beat the market or we have not mastered all 3 required skills (stock selection, option selection and position management).

5- I would disagree with this hypothetical. We should out-perform the market whether we use stocks, ETFs or a combination of both.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/#comment-44275 Wed, 11 May 2016 12:42:12 +0000 http://www.thebluecollarinvestor.com/?p=13775#comment-44275 Members,

I just returned from hosting 2 seminars and a book signing in Las Vegas. Really great to meet so many BCI members. The image below is of the master’s class I taught…great group. I’ll be catching up with emails during the week but then heading to Baltimore this weekend for another presentation.

CLICK ON IMAGE TO ENLARGE & USE BACK ARROW TO RETRN TO BLOG

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/#comment-44269 Wed, 11 May 2016 12:23:31 +0000 http://www.thebluecollarinvestor.com/?p=13775#comment-44269 In reply to Nate.

Nate,

It’s really all about the time remaining in the contract. It’s important to remember that Theta causes time value to erode to zero by expiration for all options. If we find little or no differences between time values it may be because we waited too long to act before time value had reared its ugly head and wiped away most of the time value for all strikes.

For looking to hit a double, it’s also about the time. We give the stock a few days or maybe even a week to recover as long as we are in the first half of a contract. I always like to generate a net options credit when “hitting a double” If share price continues to decline, there’s always rolling down.

Now I created a screenshot below to clarify rolling down:

We’ll make an assumption that HD was trading at $140.00 when the covered call was initiated. Also assuming a 2%, 1-month return, we generate $280/contract from the initial option sale. Now today the stock is trading at $137.51 or down $2.41. If we rolled down we would generate an additional option credit of $87/contract ($2.14 – $1.27) for a total option credit of $3.67. Our current stock price position is down $2.49 leaving us with a current net profit of $3.67 – $2.49. Rolling down solidified our winning position.

CLICK ON IMAGE TO ENLARGE & USE BACK ARROW TO RETRN TO BLOG

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/#comment-44255 Wed, 11 May 2016 11:47:47 +0000 http://www.thebluecollarinvestor.com/?p=13775#comment-44255 In reply to Adrian.

Adrian,

Comparing to S&P 500: A better choice of words (on my part) would have been “price-performance”

Replacement stock: Yes, that’s right.

1- I look for 1% over and above the profit generated from my initial position.

2-Correct. The purpose of the MCU exit strategy is to generate higher than a maximum return. If that cannot be achieved, let’s not spend the small amount of time value that remains or the broker commissions.

Will get back you are 3,4 and 5.

Alan

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By: Roni https://www.thebluecollarinvestor.com/when-is-it-appropriate-to-use-covered-call-writing-a-new-perspective/#comment-43882 Mon, 09 May 2016 20:30:48 +0000 http://www.thebluecollarinvestor.com/?p=13775#comment-43882 In reply to Jay.

Feels real good to have your support Jay.
I apreciate it.
Cheers – Roni

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