Comments on: Writing Covered Calls On Broad Market Exchange-Traded Funds https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/ Learn how to invest by selling stock options. Thu, 24 Jul 2014 15:14:10 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/#comment-20117 Thu, 24 Jul 2014 15:14:10 +0000 http://www.thebluecollarinvestor.com/?p=9952#comment-20117 Adrian,

Once you place your buy-to-close limit order, have an arrangement with your broker for some form of notification, if executed (phone, email etc.). The next step will be based on the parameters set forth in my books/DVDs or the ones you have personally set for yourself:

wait…with a goal of “hitting a double”
roll down
sell stock

Some brokerages also have advanced orders that can be placed called “OTO: or one triggers other. Here you can place an order that if the buy limit order is executed then sell stock or roll down order will be triggered. Check with your broker to see what’s available and which works best for you given the major difference in time zones.

Some brokerages (most) also offer buy/write combination forms where you can close an entire covered call position by setting a net credit limit order where the sale of the stock minus the buy back of the short call must be > than a certain amount determined by you. Again, check with yiour broker to see what’s available and in your best interest.

Alan

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By: Adrian https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/#comment-20108 Thu, 24 Jul 2014 06:37:58 +0000 http://www.thebluecollarinvestor.com/?p=9952#comment-20108 Alan, I asked you a question to your reply above which you stated:- “Once you enter your initial cc position, set a buy limit order to buy back the option.”
And now I need to ask you again how best to going about applying this next option leg after the Buy limit order. My revised reply is below:-
I am thinking by the time I get to read the email notification (if any), that in my time-zone the ‘US market’ has already closed, and then in my evening after work I would be thinking of and then most likely putting in an exit strategy order. Or should I put in an audible alert on computer/phone, meaning I would then need to wake up to enter this exit strategy order? ( I thought this is probably what I should do when a stock underperforms – as maybe by next morning some stock may have opened much lower?)?

So as you can tell in my position here I’m not quite sure the best thing to do – an order after work or an audible alert?
Thanks again for your understanding.

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By: Alan Ellman https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/#comment-20088 Tue, 22 Jul 2014 16:09:42 +0000 http://www.thebluecollarinvestor.com/?p=9952#comment-20088 In reply to Peter.

Hi Peter,

I’m assuming this is a stock in a longer-term “buy-and-hold” portfolio rather than a stock you selected for a traditional cc writing portfolio because of the weak fundamentals and technicals. If so, cc writing will definitely help to mitigate losses and generate a constant income stream.

Here is how we can view this, now, 2-month trade (not for tax purposes):

The first month resulted in a slight loss but the trade continues into month 2. As you enter the 2nd option sale, your cost basis is now $22.45. Let’s use that as our starting point in this 2-month trade:

You then sold the August $22 in-the-money strike for $1.30, of which $0.45 is intrinsic value which “buys down our cost basis to $22. The time value remaining on the 2nd premium is $1.30 – $0.45 = $0.85 or $85/contract. Your new breakeven = $21.15.

If DWA remains above $22, your 2-month return calculates as follows:

$85/$2200 = 3.9%

Please note that there is an upcoming earnings report next week that can shake things up. That’s why your potential return is still high but so is the risk you are exposed to. I always avoid ERs when selling cc options.

Hope everything works out.

Alan

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By: Peter https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/#comment-20087 Tue, 22 Jul 2014 16:07:31 +0000 http://www.thebluecollarinvestor.com/?p=9952#comment-20087 Hi Alan, my previous ITM options trade expired worthless recently closing below the strike but above my breakeven. I had bought 1,700 DWA shares for $23.95 and sold 17 July19 23.00 strike for $1.50 premium. My breakeven was $22.45.

Today I sold 17 ITM Aug16 contracts again on the same shares but at the lower $22.00 strike for $1.30 premium while the stock was trading below my previous breakeven somewhere between $22.40-$22.44.

I need help understanding two things…

1. How to calculate my losses on the previous trade since I sold options on the same shares?

2. What is my average share price now for today’s trade so I can figure out my new breakeven, time premium, etc..

Thank you,
Peter

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By: Alan Ellman https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/#comment-20086 Tue, 22 Jul 2014 15:38:27 +0000 http://www.thebluecollarinvestor.com/?p=9952#comment-20086 Justin,

As always you are posing an astute question on an important topic. I’m going to give a brief response in this venue and follow-up with a blog article in the near future:

Most of the stocks and ETFs appearing in our Premium member reports which have weeklys are part of the “expanded weekly program” This means that the options are created and made available to us in the current and next months. This is compared to the “standard weeklys” which are created at the end of 1 week and expire at the end of the next. The following weeks “weekly” is then created the next week…make sense? Stated differently, standards are created 1 week at a time while expanded weeklys are created 1-2 months in advance of expiration.

That said, there are 2 points that we need to know in this regard:

1- The date the option was created is much less of a consideration than the date you enter the trade. Both the time value of the option and the impact theta is projected to have is evaluated from point of entry of the trade rather than what it was at some point in the past.

2- Theta (time value erosion) is logarithmic in nature, not linear. The closer to expiration we enter a trade the greater the impact of theta. So if you sell a weekly 4 weeks away, it;’s like selling a traditional monthly. As a matter of fact, there are no weeklys the 3rd Friday of the month because monthlys expiring in a week, are in fact weeklys at that point in time.

Look for a more detailed article in a month or two.

Congratulations on your recent trading success…so inspired to see your progress.

Alan

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By: Justin https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/#comment-20085 Tue, 22 Jul 2014 15:24:05 +0000 http://www.thebluecollarinvestor.com/?p=9952#comment-20085 Alan –

I have a question pertaining to option cycle start, and maximizing return using theta.

I continue to paper trade select SPDR ETFs (and others) from the BCI premium members’ watch list. I’m having success, regularly ‘pocketing’ 1-2% per month. My confidence is growing, but I’m continuing to learn before going live.

I have a question about theta and option cycles. On page 158 of your Encyclopedia for CC Writing, the first paragraph mentions selling your option early in the option cycle in order to take advantage of theta (time value erosion). I understand this concept.

What I’m having trouble understanding is this; some of the ETFs have weekly options, (in addition to their standard monthly options). How do I determine if the covered calls that I am selling are being sold early enough in the option’s cycle in order to take maximum advantage of theta?

For instance on July 18th I bought 100 RSX at $25.10/share. That same day I sold the 08 Aug 14, 25.00 ITM strike for $0.70.

There are a total of 22 days from July 22nd to August 8th, am I to assume that the Aug 8th contract began on July 8th? In other words when did this option cycle begin and am I maximizing the advantage that theta offers, or should I have sold this call earlier than July 18th? In general my question is how do you tell when a given option contract began if it doesn’t expire on the 3rd Friday of the month?

I’m assume this will be of even more importance when I move out of trading ETFs and into Stocks when have more capital.

Thanks as always,

Justin

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By: Adrian https://www.thebluecollarinvestor.com/writing-covered-calls-on-broad-market-exchange-traded-funds/#comment-20084 Tue, 22 Jul 2014 06:34:06 +0000 http://www.thebluecollarinvestor.com/?p=9952#comment-20084 Alan, thanks for clarifying with that answer. So after I setup a buy/limit order for when the option price meets the % guideline, then my brokerage company should send out an email notification to me. But would this email notification always be a reliable way, – what if they forget?, or does an alert then come out for them?
– And in my imagination here it seems that by the time I get to read the email notification(if any), that in my time-zone the ‘US market’ has already closed and then in my evening(after work) I would be thinking of implementing one of the exit strategies, when still in my evening here I enter in the next order – can you confirm this is alright to do?
Now the other option of course would be for me to have some audible alert on computer/phone, and then I wake up each time during my night to enter an exit strategy order,- I thought this is probably what I should do when a stock underperforms – as maybe by next morning some stock may have opened much lower?
Not quite sure if waiting after market closed for email checks is the appropriate plan here, if you can advise the best thing.Thanks

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