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The 3 required skills for covered call writing and selling cash-secured puts are stock selection, option selection and position management. This article will use real-life examples highlighting the first 2 of these skill sets in a bull market environment.

 

Article assumptions and guidelines

  • Portfolio is set up in a bull market environment
  • Target goals for initial time value returns are 2% – 4%
  • $50k cash available
  • Select 5 different stocks in 5 different industries
  • Adequate cash allocation
  • 2% – 4% of total cash available reserved for exit strategy execution, if needed
  • Premium Report dated 12/15/2017 for 1/19/2018 expirations is used for stock selection

 

Stocks selected

covered call writing stock selection

Bull Market Portfolio for January 2018 Expirations

 

Selection guidelines achieved

  • 5 different stocks
  • 5 different industries
  • Cash allocation near $10,000.00 per position (no single position dominates from a cash investment perspective)
  • Adequate cash reserve ($2323.00) for potential exit strategy opportunities

 

Calculating Initial time value portfolio returns

                                                                                                            

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Portfolio ROO and Upside Potential

 

Calculation guidelines achieved

Returns fall into our target 2% – 4% range (2.4%)

Establishing a significant upside potential bull market opportunity (3.6%)

 

Discussion

When targeting initial time value return goals (ROO) for our covered call writing portfolios of 2% – 4%, we are using these stats to set up the portfolios. Final results can be lower or higher. In bull markets we favor out-of-the-money strikes which offer the opportunities for share appreciation up to the strike price in addition to the option premiums…two income streams per position. In the real-life portfolio highlighted in this article, the average initial return (ROO) was 2.4% and the potential share appreciation averaged 3.6%. This created a portfolio with a possible 6%, 1-month return. Stock and option selection were discussed in this article but I would be remiss if I didn’t mention the importance of position management in our final returns. Also, two final points:

  • The odd $94.95 strike for MKSI was a result of a contract adjustment after a corporate event
  • Bid prices were used for the calculations. Leveraging the Show or Fill Rule may have elevated the returns displayed

 

Upcoming event

Chicago Stock Trader’s Expo: All Stars of Options

Sunday July 22nd 12:30 PM – 1:15 PM

“How to Select the Best Options in Bull and Bear Markets”

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Hyatt Regency Hotel @ McCormick Place

2233 South Dr. martin Luther King Jr. Drive

Chicago, IL 60616

Click here for details

See all events

 

Market tone

This week’s economic news of importance:

  • NAHB home builder’ index June 68 (70 last)
  • Housing starts May 1.301 Million (1.300 million expected)
  • Building permits May 1.301 million (1.364 million last)
  • Existing home sales May 5.43 million (5.52 million expected)
  • Weekly jobless claims 6/16 218,000 (220,000 expected)
  • Philly Fed June 19.9 (29.0 expected)
  • Leading indicators May 0.2% (0.4% last)
  • Markit manufacturing PMI June 54.6 (56.4 last)
  • Markit services PMI June 56.5 (56.8 last)

 

THE WEEK AHEAD

Mon June 25th

  • Chicago Fed national activity index May
  • New home sales May

Tue June 26th

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  • Case-Shiller home price index April
  • Consumer confidence index June

Wed June 27th

  • Durable goods orders May
  • Pending home sales May

Thu June 28th

  • Weekly jobless claims through 6/23
  • GDP revision Q1

Fri June 29th

  • Personal income May
  • Consumer spending May
  • Chicago PMI June
  • Consumer sentiment (final) June

For the week, the S&P 500 moved down by 0.89% for a year-to-date return of 3.04%

Summary

IBD: Confirmed uptrend

GMI: 5/6- Buy signal since market close of April 18, 2018

BCI: Favoring 3 out-of-the-money calls for every 2 in-the-money calls. 

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a neutral tone. In the past six months, the S&P 500 was up 3% while the VIX (13.77) moved up by 40%.

Wishing you much success,

Alan and the BCI team



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