When entering our covered call trades with new positions, we buy the stock and immediately sell the option. This can be accomplished by legging-in or using a buy-write combination form. This is an important guideline because we will be assured of capturing our initial time value return goals. On August 6th, 2018, Joanna shared with me a series of trades she executed which she appropriately titled her “Tale of DOH”


Joanna’s email

I’m writing today to tell my recent tale of woe. Actually, I think it’s more appropriately named “Tale of *DOH!*” So, on 7/20/18, I decided to do some covered calls on HQY, CPRT, and HDS. However, I got cheeky and bought only the shares first to capture higher call premiums when the prices go up instead of doing buy/writes. I won’t even say what happened in the next several days after buying the shares since one glance at the charts will tell all. The moral of the story is that I could have very well hit doubles on all three of these had I stuck to the prescribed strategy of doing buy/writes. Instead, I’m still holding the shares waiting to just hit a single! *ARGH* 

One of the many great things that I like about the buy/write strategy is that it doesn’t matter if your shares are going up or going down… either way, there is potential to make more money. This effectively removes almost all of the anxiety/frustration that I used to feel when I would see my shares start to fall. The frustration is now replaced with happy feelings of potentially doubling income on my premiums. So, from now on, it’s buy/writing every single time!


“Hitting a double” exit strategy

This position management opportunity arises when share value declines causing option premium to meet our 20%/10% guidelines in the first half of a contract. Short calls are closed and re-sold if and when share value recovers. From a chart perspective, we will see a classic V-shaped pattern where stock price declines and then rises.


Chart patterns consistent with “hitting a double” 


covered call writing exit strategies

Health Equity Inc. (NASDAQ: HQY)


covered call writing technical analysis

Copart Inc. (NASDAQ: CPRT)


covered call writing trades

HD Supply Holdings Inc. (NASDAQ: HDS)


***For more information on covered call writing exit strategies, see the “exit strategy” chapters in both versions of The Complete Encyclopedia for Covered Call Writing.


Impact of overall market on stock price

The factor that has the greatest impact on share price is the movement of the overall market. Have a look at this comparison chart I created using the S&P 500 as the market benchmark and reflected how the 3 securities declined at the same time as did the S&P 500:


market imp[act on stock price

Comparing the S&P 500 with HQY, CPRT and HDS


For our covered call writing or put-selling portfolios, we select our underlyings based on fundamental, technical and common-sense analysis. Then we check the option chains to make sure the premium can generate initial time value returns that meet our goals. Assuming all requirements meet our goals, the stock is included in our monthly portfolio. Now, buying a stock and waiting for share appreciation is adding additional risk to a conservative strategy. Any security can be brought down by a declining market. If that occurs, time value returns may now not meet our goals. Or we may have to use a lower strike, locking in a loss on the stock side. If share price rises, we win but is the risk worth it?

The BCI guideline for buying a stock specifically for covered call writing is to buy the stock and sell the option simultaneously (buy stock and then immediately sell the option or use a buy/write combination form). At this point, we have successfully established our initial time value return goals and move to management mode where we look to mitigate losses and enhance gains. If there is a group of stocks that we like for long-term growth, we can establish a separate portfolio outside our option-selling accounts.



The BCI team has been working on a new trade planner to assist in managing our covered call writing, cash-secured put and put-call-put trades. We expect this tool to be available in the next few months. The image below depicts the covered call writing tab (gray cells have dropdowns):

option calculations

BCI Trade Planner


Upcoming event

February 7th – 10th, 2019

Orlando Money Show

Omni Orlando Resort @ Champions Gate

February 7th – 10th 2019

Speaking schedule:

1. Getting Started with Stock Options: Creating Monthly Cash Flow with Covered Call Writing 
February 8, 2019, 3:10 pm – 3:40 pm

2. Video Interview Q&A

3. Getting Started with Stock Options: How to Select the Best Options in Bull and Bear markets
February 9, 2019, 2:00 pm – 2:45 pm 


Your generous testimonials (new feature)

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:


I started employing the covered call writing strategy you teach in the 2nd quarter of last year. I have already realized some nice returns by employing this strategy. I finished 2018 at 4.6% on my main IRA. I thought that was decent compared to S&P being down 6-7%. Thanks for all you do for all of us do-it-your-selfers!



Market tone

This week’s economic news of importance:

  • Chicago Fed national activity index Dec. 0.27 (0.21 last)
  • Case- Shiller house prices Nov. 5.2% (5.3% last)
  • Consumer confidence index Jan. 120.2 (124.0 expected)
  • ADP employment Jan. 213,000 (263,000 last)
  • Pending home sales Dec. -2.2% (-0.9% last)
  • FOMC announcement2.25% – 2.5% (as expected)
  • Weekly jobless claims 1/26 253,000 (216,000 expected)
  • Employment cost index Q4 0.7% (0.8% expected)
  • New home sales Nov. 657,000 (563,000 expected)
  • Nonfarm payrolls Jan. 304,000 (170,000 expected)
  • Unemployment rate Jan. 4.0% (3.9% expected)
  • Average hourly earnings Jan. 0.1% (0.2% expected)
  • Markit manufacturing PMI Jan. 54.9 (54.9 last)
  • ISM manufacturing index Jan. 56.6% (54.2% expected)
  • Consumer sentiment index Jan. 91.2 (90.7 expected)
  • Wholesale inventories Nov. 0.3% 0.9% last)



Mon Feb. 4th

Tue Feb. 5th

  • Trade balance Dec.
  • Markit services PMI Jan.
  • ISM nonmanufacturing index Jan.
  • State of the Union Address

Wed Feb 6th

Thu Feb 7th

  • Weekly jobless claims 2/2
  • Consumer credit Dec.

Fri Feb. 8th

  • Wholesale inventories Dec.


For the week, the S&P 500 moved up 1.57% for a year-to-date return of 7.97%


IBD: Market in confirmed uptrend

GMI: 5/6- Bullish signal since market close of January 31, 2019 

BCI: I am favoring out-of-the-money strikes 2-to-1 compared to in-the-money strikes. Earnings season has been a positive with a favorable jobs report and market volatility has subsided dramatically.



The 6-month charts point to an improving market tone. In the past six months, the S&P 500 down 4% while the VIX (16.14) moved up by 23%. We can’t forget that the VIX was more than double the current rating on December 24th (36.07).


Wishing you the best in investing,

Alan and the BCI team

Source link