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Our new book, Covered Call Writing Alternative Strategies and the 3 new calculators associated with the 3 strategies highlighted in this book (Portfolio Overwriting, The Collar Strategy, The Poor Man’s Covered Call) are now available in the BCI store. We are offering early-order discount promo codes for the book and the 3-calculator package through July 20th:

newbook5: $5.00 off the price of the new book ($27.00 – $5.00 = $22.00). The book will cost $35.00 when available on Amazon.com.

3calculators20: $20.00 of the price of the 3-calculator package ($79.00 – $20.00 = $59.00)

To receive both discounts, place 2 separate orders.

***Discount codes expire on July 20th

 

Covered Call Writing Alternative Strategies (new book) 

 

-Portfolio Overwriting- using stocks in buy-and-hold portfolios
-The Collar Strategy- using protective puts
-The Poor Man’s Covered Call- using LEAPS options

Covered call writing is a cash-generating strategy that lowers our cost basis thereby improving our opportunities for successful investments. One of the many benefits of incorporating this strategy into our investment portfolios is that the system can be crafted to meet our trading style, market assessment, portfolio net worth and personal risk tolerance. This book details three such covered call writing-like strategies that will highlight:

-Option basics
-Practical application
-Calculations
-Real-life examples
-Role of brokerages
-Pros and cons of strategies
-Option Greeks
-Exit strategies
-Flow charts
-Calculator user guides
-And much more

 

The Calculator Package includes:

 

 

3 spreadsheets:

-PMCC Calculator
-BCI Collar Calculator
-BCI Portfolio Overwriting Calculator

These calculators are designed to determine initial trade structure and status as well as various position management price point considerations the exit strategy price buyback points to buy back the short calls based on the 20%/10% guidelines detailed in the BCI books and DVD Programs.

 

Book information: Promo code: newbook5

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Calculator package information: Promo code: 3calculators20

 

***Discount codes expire on July 20th

 

Rolling Down Our Put Positions: When and Why?

When selling cash-secured puts, our breakeven stock price is the (out-of-the-money) strike price less the put premium. Our exit strategy guideline as to when to close the short put (buy back the put) is when share value declines to more than 3% below the strike price. Once we execute the buy-to-close trade, we no longer are committed to an option obligation and the cash used to secure the put is now freed up to secure another put. Recently, Kevin C sent me an email asking why not routinely roll down when share price declines below the 3% threshold price? Rolling down is one of our standard exit strategy considerations when share price declines in our covered call positions so why not with puts? This article will address when and why to roll down with puts and scenarios when this is not our best choice using NetApp, Inc. (NASDAQ: NTAP) as a real-life example.

 

Initial put-selling trade with NTAP

  • 12/18/2017: With NTAP trading at $58.50, sell the slightly out-of-the-money $58.00 put for $2.00
  • Breakeven is $56.00 ($58.00 – $2.00)
  • Threshold for 3% guideline to buy back the puts is below $56.26
  • 1/2/2018: Share price declines to $55.32

 

Initial trade calculations using the single-column BCI Put Calculator

 

calculating put-selling trades

NTAP: Initial Put-Selling Calculations

 

Note the following information gleaned from the BCI Put Calculator:

  • Initial 1-month time value (unexercised) return is 3.57% (40.74% annualized) a shown by the red arrows
  • If the option is exercised, shares are purchased at a 4.27% discount from share price when trade was entered

 

Checking the option chain when closing the initial short put

put option chain

NTAP Put Option Chain on 1/2/2018

 

Note the following:

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  • The cost buy back the $58.00 put is $3.10 as shown in the yellow fields
  • To roll down to the out-of-the-money $54.00 put strike we would generate $0.52 per share as shown in the brown fields
  • If share price remains above the $54.00 put strike our net option loss is $0.58 per share ($2.00 + $0.52 – $3.10)
  • Rolling down cuts the option loss almost in half ($1.10/$0.58)

 

Do we roll down routinely to mitigate losses when trades turn against us?

No. Although rolling down should definitely be in our exit strategy arsenal, there needs to be a thought process before making a decision to execute such a trade. With covered call writing, we own the underlying so to close a position in its entirety we would need to both buy back the option and sell the underlying. With put-selling, once we buy back the short put, we have no option obligation and do not own the underlying. Selling another option while early to mid-contract is a no-brainer, but using the same underlying is not. It is instructive to remember that the stock in question has already under-performed our expectations. Do we want to stay committed to this now under-performer? The guideline I use is a comparison of the recent performance of the stock compared to that of the S&P 500. Let’s have a look at a comparison chart of NTAP compared to the S&P 500 over the time frame of the trade to date:

 

technical analysis and put-selling

Comparison Chart of NTAP and the S&P 500

 

Note the following:

  • When the trade was entered (purple bar), NTAP (brown line) was trading above the S&P 500
  • On December 20th, there was a bearish movement of NTAP price movement to below that of the S&P 500
  • On 1/2/2018 (gold bar), NTAP price continued to decline and remains under the price action of the S&P 500
  • Had the price movement of NTAP remained above that of the S&P 500, I would strongly consider rolling down
  • In a case like this one, I would reject rolling down and enter a new put sale with a different underlying to mitigate the current loss of $1.10 per share ($3.10 – $2.00)

 

Discussion

Rolling down a short put is part of our position management arsenal but should be mainly implanted in scenarios when declining share price is out-performing the overall market.

 

Ask Alan #148: Why is this Great-performing Stock No Longer Eligible?

A new Ask Alan video has been added to the Premium and Video Member sites. Only premium and video members have access to our entire library of (now) 148 Ask Alan videos. A new video will be added each month, all based on questions received from members of the BCI community.

 

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”

Hyatt Regency Hotel @ McCormick Place

2233 South Dr. martin Luther King Jr. Drive

Chicago, IL 60616

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Click here for details

See all events

 

Market tone

This week’s economic news of importance:

  • Consumer credit May $25 billion ($10 billion last)
  • Job openings May 6.6 million (6.8 million last)
  • Producer price index June 0.3% (0.2% expected)
  • Wholesale inventories May 0.6% (0.1% last)
  • Weekly jobless claims 7/7 214,000 (226,000 expected)
  • Consumer price index June 0.1% (0.2% expected)
  • Core CPI June 0.2% (as expected)
  • Import price index June-0.4% (0.9% last)
  • Consumer sentiment index July 97.1 (98.9 expected)

 

THE WEEK AHEAD

Mon July 16th

  • Retail sales June
  • Business inventories May

Tue July 17th

  • Industrial production June
  • Home builders’ index July

Wed July 18th

  • Housing starts June
  • Building permits June
  • Beige book

Thu July 19th

  • Weekly jobless claims through 7/14
  • Philly Fed July
  • Leading economic indicators June

Fri July 20th

For the week, the S&P 500 moved down by 1.50% for a year-to-date return of 4.78%

Summary

IBD: Market in confirmed uptrend

GMI: 6/6- Bullish signal since market close of July 9, 2018

BCI: Using an equal number of in-the-money and out-of-the-money strikes. Tariffs and global relationships are concerns. Anticipating another favorable upcoming earnings season.

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

The 6-month charts point to a neutral to bullish tone. In the past six months, the S&P 500 was up 0% while the VIX (12.17) moved up by 5%.

Wishing you much success,

Alan and the BCI team



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