Strike price selection is one of the 3-required skills when selling covered calls or cash-secured puts. This article will highlight the choices and rationale for our decisions when selling puts for World Wrestling Entertainment, Inc. (NYSE: WWE) on 9/24/2018.

 

Bullish price chart for WWE

 

technical analysis for options

WWE: Bullish Moving Averages

 

Option-selling lowers our cost-basis and therefore we make money as long as share value does not decline significantly. Bullish technical charts like this one for WWE as of 9/24/2018 is precisely what we are looking for in our put-selling portfolios.

 

Option chain for WWE

strike price selection

WWE Option Chain on 9/24/2018

 

With WWE trading at $92.68 on 9/24/2018, we will evaluate the $85.00 (out0f-the-money), $90.00 (out-of-the-money) and $95.00 (in-the-money) strikes (brown field). All 3 choices have adequate open interest of 100 contracts or more (purple field). The published “bid” prices are found in the yellow field:

  • $85.00 strike: $0.95
  • $90.00 strike: $2.15
  • $95.00 strike: $4.50

***We may be able to generate higher bid premiums by leveraging the Show or Fill Rule. See pages 225 – 227 of The Complete Encyclopedia for Covered Call Writing- classic edition for more information on “negotiating” with market-makers.

Let’s now feed this information into the 3-column version of the BCI Put Calculator (free to premium members; single column available for free on this site…expanded version available in the BCI store).

 

WWE calculations

 

Put Calculator

WWE: Calculations

 

$85.00 strike

  • Lowest risk of exercise
  • Requires the lowest amount of capital outlay ($8405.00)
  • Unexercised return is 1.13%; 16.50% annualized
  • 9.31% discount, if exercised
  • Lowest breakeven at $84.05

$90.00 strike

  • Moderate risk of exercise
  • Requires $8785.00 of capital outlay
  • Unexercised return is 2.45%; 35.73% annualized
  • 5.21% discount, if exercised
  • Lowers breakeven to $87.85

$95.00 strike

  • Greatest risk of exercise
  • Requires the highest amount of cash outlay ($9050.00)
  • Unexercised return (stock must move above the $95.00 strike) is the highest at 4.97%; 72.60% annualized
  • 2.35% discount, if exercised (lowest of the 3 choices)
  • Breakeven is lowered to $90.50, the highest price point of the 3 strikes

 

Discussion

Strike price selection when selling puts is based on overall market assessment, chart technicals, initial time value return goals and personal risk tolerance. The $85.00 strike offers the greatest amount of downside protection but the lowest unexercised return. The $90.00 strike offers an excellent 25-day unexercised return of 2.45% and lowers the breakeven by 5.21%. The $90.00 strike offers the greatest unexercised return if share price moves above the strike but also presents the greatest risk of exercise. When it comes to puts, most investors do not want to take possession of the stock (there are exceptions as when selling puts instead of setting limit orders), so we will generally favor out-of-the-money puts. From there, we allow of return goals to dictate. For me, I require a range of 2% to 4% for initial time value returns. This would lead me to favor the $90.00 strike. More aggressive investors may opt for the $95.00 strike and more defensive investors may look to the $85.00 strike. All are the correct choices as long as they align with system criteria including meeting time value return goals and personal risk-tolerance.

 

March 8th stock report

*** PLEASE NOTE: The stock report for the week ending March 8th will be published on Monday March 11th, later than usual, due to vacation and travel plans. Every effort will be made to post this report as early as possible.

 

Upcoming events

-March 29th

Quinnipiac GAME Forum
International forum for college and graduate school finance majors

-May 8th 

Alan will be hosting a free webinar for the Options Industry Council (OIC) on generating income from selling options. More information to follow.

-May 13th

All Stars of Options

Bally’s Hotel, Las Vegas

10 AM – 10:45 AM

How to Select the Best Options in Bull and Bear Markets

Free event

-May 14th

Las Vegas Money Show

Bally’s/ Paris Hotel

12:15 – 3:15

Master class encompassing covered call writing, put-selling and the stock repair strategy

This is a paid event hosted by The Money Show

 

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:

Alan,

Your weekly blog articles and library have been a wealth of information I look forward to with each week’s new edition.

Thanks for providing this feature.

Jim W

 

Market tone

This week’s economic news of importance:

  • Construction spending Dec. -0.6% (-0.3% expected)
  • Markit services PMI Feb. 56.0 (56.2 last)
  • New home sales Dec. 621,000 (600,000 expected)
  • ISM nonmanufacturing index Feb. 59.7% (57.5% expected)
  • Federal budget Jan. $9 billion ($49 billion last)
  • ADP employment Feb. 183,000 (300,000 last)
  • Trade balance Dec. -59.8 billion (-$58.0 billion expected)
  • Weekly jobless claims 3/2 223,000 (225,000 expected)
  • Productivity Q4 1.9% (1.8% expected)
  • Consumer credit Jan. $17 billion ($15 billion last)
  • Nonfarm payrolls Feb. 20,000 (175,000 expected)
  • Unemployment rate Feb. 3.8% (as expected)
  • Average hourly earnings Feb. o.4% (0.3% expected)
  • Housing starts Jan. 1.230 million (1.212 million expected)
  • Building permits Jan. 1.345 million (1.326 million last) 

 

THE WEEK AHEAD

Mon March 11th

  • Retail sales Jan.
  • Business inventories Dec.

Tue March 12th

  • NFIB small business index Feb.
  • Consumer price index Feb.

Wed March 13th

  • Durable goods orders Jan.
  • Producer price index Feb.

Thu March 14th

  • Weekly jobless claims 3/9
  • New home sales Jan.

Fri March 15th

  • Empire state manufacturing index March
  • Industrial production Feb.
  • Job openings Jan.
  • Consumer sentiment March

For the week, the S&P 500 moved down 2.16% for a year-to-date return of 9.42%

Summary

IBD: Market in confirmed uptrend

GMI: 4/6- Bullish signal since market close of January 31, 2019 

BCI: I am favoring out-of-the-money strikes 3-to-2 compared to in-the-money strikes for new positions. 

 

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

The 6-month charts point to a slight turndown this week. In the past six months, the S&P 500 down 5% while the VIX (16.05) moved up by 14%. 

 

Wishing you the best in investing,

Alan and the BCI team

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