When we sell covered calls or cash-secured puts, we understand that if a strike ends up in-the-money at expiration, that option will be exercised over the weekend and shares will be sold or purchased depending on the option type (for calls, our shares are sold; for puts, new shares are purchased with the cash set aside in our account). On April 5th 2019, Daniel wrote to me about a cash-secured put he sold with an expiration date of April 5th 2019. At 4 PM ET on expiration Friday the strike was out-of-the-money but the put was exercised over the weekend and Daniel was baffled as to why this occurred.
Daniel’s trade
Daniel sold a Weekly $390.00 put option for The Boeing Compnay (NYSE: BA) with an expiration on April 5, 2019. At 4 PM on that date, BA was trading at $391.93, leaving the sold put strike $1.93 out-of-the-money seemingly safe from exercise. The next day, Daniel checked his brokerage account and noticed that he now owned BA and the cash set aside in his brokerage account for this trade was gone. What happened?
The mechanics of exercise
Out-of-the-money strikes are almost never exercised. In this case, why would a market professional (like a market-maker) want to sell BA for $390.00 when it is currently trading at $391.93? The market-maker has 90 minutes after market close to inform the Options Clearing Corporation (OCC) as to what action, if any, they want regarding their long option position… allow the option to expire worthless or exercise the option.
Let’s go back to 4 PM ET on April 5th
BA announced that it would cut back production of its 737 Max jets after 2 fatal crashes. This news was published in the 90-minute window after market closed and when market-makers had to notify the OCC regarding action on their long puts. It was obvious at this point that share price would likely decline by market open on Monday leaving the now out-of-the-money put in-the-money the following week. Exercise would benefit long put holders and put those with short positions at risk.
BA chart showing price decline between April 5th and April 8th
BA: After-Hours Price Decline
On Monday April 8th, BA was trading at $377.00, creating an unrealized loss of $13.00 per share for Daniel. On the surface, this does not seem fair but it is the nature of how trading occurs and the risks that both market-makers (they are required to take positions) and retail investors (risk on unexpected bad news) undertake.
How could this have been avoided
Most of us would have taken no action as did Daniel. But, if we wanted to avoid any chance of bad news coming out in that 90-minute window, we could have closed the options prior to 4 PM ET. Since there was virtually no time value remaining as 4 PM approached, it would have been pennies per share plus small trading commissions to do so. These events are quite rare but do hurt. So how do we determine if we should close? In this case, BA has been in the news quite frequently after the 2 crashes and so there was risk with this stock and the potential of negative news. Conservative investors may have considered closing and then “getting out of Dodge” with a new stock the following week.
Discussion
There is assignment risk with out-of-the-money strikes if news comes out (positive or negative) in the 90-minute window after market closes on expiration Friday. A stock that has been generating an unusual amount of significant news is particularly susceptible. On a similar note, pinning the strike is another reason unexpected assignment may occur.
FREE Beginner’s Corner Tutorial for Covered Call Writing has Been Enhanced and Updated
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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:
Hi Alan,
I have learned a lot about covered call writing from your book, Complete Encyclopedia for Covered Call Writing. I must say, your technical indicators set-up is the best I’ve ever come across and is now the default setting in my trading platform
Regards,
Sajar
Upcoming event
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BOOTH 314
Saturday October 26th workshop presentation: Covered Call Writing & the Stock Repair Strategies: 10:30 -11:45 AM
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Alan,
Really enjoyed the live streams lately, appreciate those!
1. Do you have a Portfolio Overwriting Calculator? Im reading the CC Writing Alternative Strategies now.
2. If you prefer OTM strikes for your monthly CC writing, assuming mkt conditions are favorable. Do you find that you have to use more exit strategies than say you would with ITM strikes that you do nothing with?
-Mark
Mark,
1. Yes, here is the link to learn more about the BCI Portfolio Overwriting Calculator:
https://thebluecollarinvestor.com/minimembership/portfolio-overwriting-calculator/
2. Exit strategy opportunities present with both ITM and OTM strikes equally. For example, ITM strikes are subject to the 20%/10% guidelines as are OTM strikes as well as for the mid-contract unwind exit strategy. We must be prepared to take advantage of exit strategy opportunities whether we are dealing with ITM or OTM strikes.
Alan
Live video interview from The Philadelphia Money Show with Hillary Kramer:
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Great to see so many of our BCI members attend my seminars in Philadelphia:
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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 09/27/19.
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
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan
I m interested in PMCC calculator but I would like to know if it is able to take track of all the trades on the same position. I mean I would like to see how the trade is going, so would be nice if the calculator can deduce from the starting BTO of the LEAP all the following STO of the short position as well as adding to the cost when you have to BTC the short to avoid exercise.
If the PMCC calculator can not do this does someone have a spreadsheet or an excel able to do this? Btw the PMCC calculator looks awesome!
Have care
Federico,
Yes, the PMCC Calculator addresses all aspects on the trade from initiation through closing. It was, by far, the most challenging calculator to develop as it contains over 20 equations that depend on each other for accuracy. I know of no other spreadsheet that contains the detail inherent in this calculator for the PMCC strategy. Here is a link to learn more about this calculator:
https://thebluecollarinvestor.com/minimembership/poor-mans-covered-call-calculator/
Alan
Hey Friends,
A happy weekend to all. Hope your favorite team comes out on top! I live in New Orleans so mine is the Saints. They have the tall task of hosting the Cowboys tonight. Our QB is out for a while but, pardon me Dallas fans, it would be great if they pull this one off!
I was talking about the market with another friend who shares this affliction. Funny, we can look at the same chart or hear the same news and interpret market implications differently :).
What we agree on is we have to keep our cash working. In the past when I was worried about the market I kept large money market balances. Normally the market train waved and went on by.without me. Of course there are rough times and patches and no market goes straight up. But hiding cash under the mattress does not make much sense unless for current year expenses as a fellow retiree.
These days I either own stocks/ETF’s and over write some of them or I “under write” the market to keep the cash busy. If I sell a cash secured put for maybe a half percent a month on QQQ it’s going to be OTM, I would not mind buying it on that type correction and 6% annual yield on “Nervous Nellie” cash is better than I would ever get at the bank :)! – Jay
Hi Jay,
good luck with the Saints tonight. 🙂
Roni
Thanks Roni,
The Saints will need it because the Cowboys are tough! But if anyone has the time to watch the game you will also see the crazy outfits “Who ‘Dat” Saints fans wear to the games and night views of the city. We welcome one and all to the “Who ‘Dat Nation”! i Hope everyone has a great market week ahead. – Jay
Concerning the exercise of the put option: Isn’t this known as “pin” risk? When you are very close to an ATM strike(call or put)the option writer is “pinned” to the option.
Tom,
Yes. “Pinning the strike” applies to options with high open interest as expiration approaches. The price tends to move to the option strike price as expiration approaches when the market value is close to that strike. It does apply to calls and puts. Here is a link to an article I published on this topic 7 years ago:
https://www.thebluecollarinvestor.com/pinning-the-strike-a-covered-call-writing-consideration/
Alan
Hi Alan,
I am really happy about your covered call programs.
I bought the first book last week, Cashing in on covered calls and I was impressed with the simplicity and the clear explanations that you give on selling covered calls that I
have bought 3 more of your books and the Covered Call Writing streaming video !!!
I had counted cards at Black Jack in the casinos and you say that covered calls have a similar strategy that you have the odds on your favor.
I tried value investing but covered calls look Better!!!
Thank You,
Julio
Julio,
Thanks for your kind words.
The blackjack analogy is definitely relevant as it applies to the BCI approach to option-selling. We craft our decisions based on the information at hand, not one-size fits all.
For example, if our 2 cards total 11 and the dealer shows a “6”, we take advantage of that scenario by “doubling down”
In the same way, we take advantage of a bull market with bullish chart technicals by selling out-of-the-money strikes.
One big difference between the two is that with blackjack, the odds are against us (casinos are in business to make money). With covered call writing and put-selling, they are in our favor.
Alan
Alan,
Is your successes mostly on stocks or ETFs?
Thanks,
Edward
Edward,
Both. I use stocks in my portfolios and ETFs in my mother’s more conservative portfolio. Stocks offer the potential for higher returns while ETF offer lower risk with lower returns (generally), instant diversification and eliminates earnings report consideration.
Mastering the 3-required skills will allow us to beat the market on a consistent with both stocks and ETFs.
Alan
Alan, your BA explanation was great. I never thought about the situation of news coming out within that 90 minute window.
The only thing I would add to your comment, ” it would have been pennies per share plus small trading commissions to do so” is to take this one step farther and calculate the risk:reward ratio. IMO not closing is clearly penny-wise pound-foolish.
BCI Community,
Schwab just announced a change to its commission structure. Beginning next Monday, Schwab will no longer charge commissions on stocks and ETFs. As for options, the only charge will be the per contract cost.
Good news for Schwab clients.
Best,
Barry
Thanks Barry,
WOW! We all knew it was coming but when and who would be first we didn’t know. It certainly came earlier than I anticipated.
The question now is how and how soon the competition will respond.
Being an optimist by nature I expect most to go ahead and match Schwab.
Being a pessimist by nature I wonder if there will be any change in the Bid Ask spread and how would we know since it can be managed by an algorithm. 🙂
What do you think?
Hoyt
Hoyt,
In my opinion, I don’t think that the bid/ask spread will be impacted. The B/A spreads are provided by the specialists (market makers) working the the various exchanges. If anything, I could see a potential for the B/A spreads to decrease due to new traders entering the market because of no commissions and increased competition for each trade…at least that is my hallucination.
Best,
Barry
Barry,
I had not thought about it in that way. Now that I think about it I tend to agree with you.
The varying discussions today were very interesting. Several commentators said that commissions were only 6.8% of Schwab’s revenue. That came as a surprise to me. Obviously if this action brings them new clients, assuming the other brokers are slow to match, then it is mathematically possible for this to increase profitability over the next year.
Thanks again for your insight.
Hoyt
Schwab’s share price down after the announcement:
“But Schwab’s announcement pushes another new boundary.
Its shares fell almost 10 percent on Tuesday, but competitors that may feel pressure to match its offer were hit even harder. E-Trade was down more than 16 percent, and TD Ameritrade was down more than 25 percent.”
Terry
Received this Wednesday AM:
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Alan
Boy that was quick. Good for them. Let’s see how long E-Trade takes to respond.
Hoyt
Jay,
After watching my Dirty Birds getting their wings clipped I watched your Saints really dominate the very good Cowboys. The final score did not reflect the superior play of the your guys. The Saints really have no competition in their division.
Your thesis on keeping your money at work is spot on. It has been my experience that when people go to a large cash position they tend to be reluctant to reenter the market. The longer they remain out the less likely to get back in.
Selling cash secured puts keeps your money at work. I believe you should have a plan to implement when you liquidate a large position. Somewhere you expect to put that cash to work in the short term. This requires hard work and is certainly easier said than done.
Thanks again for your input.
Hoyt
Alan,
I’m 62 years old and only have about $150k to invest to create monthly revenue. Although I have been trading for many years, with mediocre results, I’m a bit paranoid to invest in this market right now. I also want to keep my trading simple as I don’t want to have to oversee more than 10 investments at most. 5 would be optimal.
I heard in one of your vids that you trade your Mom’s account using eft’s. Could you list those etfs that you trade for her? Or is there a link somewhere where you have already listed them?
Also, would you trade an equity like MPLX, a REIT, to capture the dividend as well?
Thank you,
Gerry
Gerry,
The ETFs I trade in my mother’s (very conservative) portfolio are based on the BCI Premium ETF Reports so they vary month-to-month. If I were to name the one I have probably used the most over the past decade, it’s QQQ but it is not always in her portfolio depending on price performance at that point in time.
MPLX does offer a substantial dividend (nearly 10% per year) but our decision to include this security in our portfolio should be based on much more than dividend yield. I created a 1-year comparison chart of MPLX with the S&P 500 to highlight why we may choose a different underlying (see below).
Another approach to capturing dividends along with option premium would be to consider the best-performing SelectSector SPDRs found in our weekly ETF Reports and the best-performing Dow 30 stocks found in our monthly Blue Chip Reports.
I consider dividend yield a secondary factor when selecting my underlyings with fundamental and technical analysis as well as common-sense principles taking top-billing.
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Alan
Holy dollar signs Batman I’ve died and gone to Trader heaven how are these companies going to make any money now? oh well I guess I don’t care…. I’m off to make a lot for me!!! 🙂
I saw an announcement from E-Trade. Beginning Monday October 7 zero commissions on Stocks, ETFs and Options.
Damn, that was quick for E-Trade who is always late to the party. They had just recently reduced commissions to $4.95 where SCHW and AMTD have been for some time.
Hoyt
Premium members:
This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.
New members check out the video user guide located above the recent reports.
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
We’ve had a couple of rough days but there are some positives:
– October is historically a strong month for the stock market as is the 4th quarter.
– Earnings season is coming up and the 2nd quarter earnings were stellar and many experts are predicting even better for the 3rd quarter.
– Looks like we may have another rate cut at the end of the month.
– Can’t make money anywhere else!
No one can predict with certainty what will transpire in the short run but emotions cannot rule our decisions.
Alan
Any thoughts on WEN? It’s recovery didn’t go very far. I thinking about closing the option on the 18th and dropping the stock.
Thank you,
Dietmar
Dietrmar,
I can’t give specific financial advice in this venue but I can tell you that most stocks have been down recently and WEN is actually out-performing the S&P 500 since its decline in early September. See the screenshot below. WEN is the purple line.
There is still plenty of time for share recovery prior to the 18th before a decision needs to be finalized. In the interim, we take advantage of all of our exit strategy opportunities.
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Alan
Greetings Alan,
My name is Benjamin . I’m located in Roanoke Virginia. I’m interested in learning how to trade Covered Call Writings. I’ve researched and listened to several YouTube videos however I’m still not quit comfortable in making my first trade or where to begin. I’ve funded Td Ameritrade with $3000 and I have several long term investments that I used Fidelity for. Can you offer me any assistance? Any information will be greatly appreciated.
Blessings to you,
Ben
Ben,
The education process can start today. Implementing investment strategies can start soon and option-selling can begin a bit later down the road.
We will need to build the $3k to between $10k – $15k to sell covered calls on ETFs and be properly diversified. This is a strategy I use in my mother’s account. As portfolio value grows, we can move to individual stocks.
To learn how to grow our portfolio wealth from $3k to $10k, consider the plan in my book, “Stock Investing for Students” and focus in on Chapter 6… “The Game Plan” It is user friendly and mostly automated:
https://www.thebluecollarinvestor.com/stock-investing-for-students/
While portfolio wealth is growing, option-selling education continues:
Free Beginner’s tutorial:
https://www.thebluecollarinvestor.com/beginners-corner/
Best book:
https://www.thebluecollarinvestor.com/alan-ellmans-complete-encyclopedia-for-covered-call-writing-scover/
Best DVD Program:
https://thebluecollarinvestor.com/minimembership/covered-call-writing-package-4-dvd-series-workbook/
Free Covered call writing calculator and other free resources
https://www.thebluecollarinvestor.com/free-resources/
It may seem a bit overwhelming, but approaching our financial well-being in a structured, non-emotional manner will ultimately lead to financial independence.
Alan
Hello Alan,
Watched your video tutorial on the internet about Put Options Selling.
Could you kindly tell me on How to find candidates for Put Options Selling.
Thanks,
Tony
Tony,
The screening for put-selling and covered call writing is precisely the same. In the BCI methodology, it involves a 3-pronged approach:
• Fundamental analysis (earnings and sales)
• Technical analysis (trend and momentum)
• Common-sense principles (like minimum trading volume etc.)
Here is a product file for educational tools that details the screening process and much more for put-selling.
PUT-SELLING PRODUCTS
FREE BEGINNER’S TUTORIAL
https://www.thebluecollarinvestor.com/beginners-corner-puts-selling/
BEST BOOK
https://www.thebluecollarinvestor.com/alan-ellmans-selling-cash-secured-puts/
BEST ONLINE DVD PROGRAM
https://thebluecollarinvestor.com/minimembership/selling-cash-secured-puts-basic-and-advanced-principles-2-part-dvd-series-workbook/
BCI PUT CALCULATOR
https://thebluecollarinvestor.com/minimembership/elite-put-selling-calculator-2/
Alan
If a cash covered call was made and it currently sits below the strike price and would expire worthless soon could it be exercised and using the option “buy” would those shares then now be owned by the person who made the call? I know it’s not normal but if the stocks were wanting to be retained even at a slightly higher cost.
Danny,
A call option buyer can exercise that option at any time. These are known as “American Style Options”
After-hour news aside, it would make no sense to exercise that option at the strike, if higher than current market value. Shares can simply be purchased at the lower market price.
Alan