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Never sell a covered call or cash-secured put option if there is an upcoming earnings report prior to contract expiration. I have been emphasizing this rule for over a decade in my books, DVDs, seminars and videos. There are times, however, when we have confidence in positive earnings reports based on historical data. In these rare cases, when we decide to hold the security through the report, we then write the call post-report. In this article, we will follow Broadcom, Ltd (AVGO) starting a few weeks prior to the report and then the day after the report is published (6/1/2017, after market close).

 

AVGO price chart on 5/26/2017

covered call writing and earnings reports

AVGO Price Chart on5/26/2017

 

In the weeks leading up to the earnings release, the stock was in a trading range between $230.00 and $241.00. We are going to assume a purchase price at the mid-point ($235.50). Had we sold an out-of-the-money strike, a typical 1-month return would be between 2% – 3% with upside between 1-2%. We’ll again take the middle ground and assume a maximum 1-month return of 4%.

 

AVGO price chart on 6/2/2017, a day after the earnings release

AVGO Price Chart on 6/2/2017

AVGO Price Chart on 6/2/2017

A positive earnings surprise saw share price rise to $252.31 with 3 hours remaining until market close. Had we not sold the covered call, this would represent a share increase of 7.1% from purchase price ($16.81/$235.50). With 3 weeks remaining until expiration of the June contracts, we then check the option chain to see if we can generate a second income stream with an out-of-the-money call option.

 

AVGO options chain on 6/2/2017

covered call writing options chains

AVGO Options Chain on 6/2/2017

The out-of-the-money $255.00 strike generates a premium of $2.65. Let’s feed this information into the multiple tab of the Ellman Calculator.

 

AVGO 3-week calculations post earnings report

covered call writing calculations

AVGO: Post-Earnings Report Calculations

 

The calculator displays an initial 3-week time value return of 1.1% with an additional possible 1.1% if share value moves up to the $255.00 strike by expiration. This now represents a potential maximum return of 9.3% (7.1% + 2.2%).

 

Comparison chart of AVGO and the S&P 500 leading up to the earnings release

AVGO and the S&P 500: Comparison Chart

AVGO and the S&P 500: Comparison Chart

 

Stocks that we might consider for this strategy approach are those that are out-performing the market significantly and have a history of positive earnings surprises. If we are willing to take the risk of a disappointing report, there must be a rationale for doing so.

 

Discussion

We never sell a call or put option when there is an upcoming earnings release. We may decide to hold a stock through a report and then write the call if the underlying is out-performing the overall market and has a history of positive surprises. There is risk in a disappointing report even if past reports have been positive ones.

 

Seminar just added

Charlotte, North Carolina

June 9, 2018

 

Next live events

October 4, 2017

All Stars of Options

How to Select the Best Options for Covered Call Writing in Bull and Bear Markets

10:30 AM to 11:15 AM

Hyatt Regency Dallas @ Reunion

 

October 5, 2017

Dallas Texas: October 5 2017

 

October 10, 2017:  Palm Beach Gardens Florida:

7 Pm to 9 PM

Using options to Generate Monthly Cash and to Buy a Stock at a Discount.

LOCATION: Publix Greenwise Market (2nd floor)

11231 Legacy Avenue (Legacy Place)

Palm Beach Gardens, FL 33410

Open to public

The club charges $10 at door to cover expenses.

 

Blue Chip Report

Premium members: The October 2017 edition of this report has been uploaded to your member site. Scroll down on the right side of the premium site.

 

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Those of you on our mailing list received notification of a free E-Book on top trading tips. I am one of a few authors asked to write a chapter in this free E-Book. My chapter is worth reading for option-selling but I cannot attest to the content of the others. Education is power.

 

Market tone

Global stocks were flat on the week amid somewhat firmer interest rates and oil prices. West Texas Intermediate crude oil added $1 a barrel, trading at $51.50. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), slipped to 9.51 from 10 a week ago. This week’s economic and international news of importance: 

  • President Trump unveiled a reform plan designed to simplify the US tax code. Seven tax brackets would shrink to three (with the potential for an additional bracket for high-earners) and the corporate tax rate would be cut from 35% to 20%. The plan would nearly double the standard deduction for most households and retain mortgage interest and charitable deductions while eliminating deductions for state and local taxes. The plan would end the estate tax and the alternative minimum tax
  • German chancellor Angela Merkel will be forced to craft a three-party coalition after her Christian Democratic Union fared worse than expected in Sunday’s election
  • Japanese prime minister Shinzo Abe dissolved parliament this week and called an election for October 22nd. Abe asked for a new mandate to deal with the growing threat from North Korea and said it is urgent that Japan’s social security system be rebalanced to cope with the growing number of retirees
  • US Federal Reserve chair Janet Yellen this week said it would be imprudent to keep monetary policy on hold until inflation reaches the Fed’s 2% core personal consumption expenditures target, making a December rate hike more likely
  • The US economy grew at an annual rate of 3.1%, a slight upward revision from last month’s 3% reading
  • Corporate profits advanced at an annual rate of just 0.1% in Q2, a sign that the broad economy is performing worse than large multinational firms, which have recorded two straight quarters of double-digit profit growth

THE WEEK AHEAD

Mon, Oct 2nd

  • Japan: Tankan survey
  • Global manufacturing purchasing managers’ indicies

Tue, Oct 3rd

Wed, Oct 4th

  • Global services PMI
  • Eurozone: Retail sales

Thu, Oct 5th

  • Eurozone” September European central Bank minutes
  • US: Trade balance

Fri, Oct 6th

  • Canada: Employment report September
  • US: Employment report September

For the week, the S&P 500 rose by 0.68% for a year-to-date return of 12.53%

Summary 

IBD: Market in confirmed uptrend

GMI: 6/6- Buy signal since market close of August 31, 2017

BCI: I am currently using an equal number of in-the-money and out-of-the-money strikes, taking a neutral overall portfolio position

 

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

The 6-month charts point to a neutral to slightly bullish outlook. In the past six months, the S&P 500 was up 7% while the VIX (9.51) moved down by 17%.

Wishing you the best in investing,

Alan and the BCI team

 

 

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