(or does it?) After years of email contacts with you and having had the pleasure of meeting you and your family at one of my recent seminars, I must say that I am not surprised by the quality of your post. Since Fidelity’s watch list use the Last Price consistently, I can match exactly account values in a Profit Loss Spreadsheet (Alan’s 2015 Spreadsheet, which I have modified extensively) I use to track my trades and calculate current cycle gains (can zero out gains at start of each cycle). Converting a Covered Call Trade to a Collar Trade, 41. We can sell the February $100 strike with 51 days left until expiration against our WMT January 2020 LEAPS. At the end, you may see account values differences of 0, $200, $500 or more depending on the cost of buying back your option position. On the bottom of Page 271, for a Mid contract unwind, “the option premium must be close to zero, and the new position must generate more cash than the amount of time value paid to close the original position.”. Original Investment = Strike 50 x 100 Shares = $5000. In the above graphic I used USO options and compared selling one April 10 call for 37 cents or four 10 weeklys calls between now and April which would generate about 58 cents. Let’s annualize the returns for a 1-month call option versus a 25-month LEAPS option. With Mueller’s investigation in an early phase, there will likely be many months of continued policy paralysis in Washington, Purchasing managers’ indices released this week show that the eurozone continues to outperform other developed economies. An advantage I see at Fidelity is that their watchlists also function as portfolios so you can recreate and combine accounts and see a complete picture of your accounts, including adding your option positions (50 position limit). The Weekly Repoprt has been revised and uploaded to the Premium Member website. These have been addressed. 1- Technical analysis is one of three parameters we use in the screening process and EMA is one of four technical parameters. Optionshouse uses the Mark of Midpoint price of an option. It's an ambitious strategy, to be sure. When it comes to income generation Weeklys have the upper hand. But I don’t see a crash because there is so much cautious sentiment and a lot of sideline money. He noted that his assessment was that SLV was undervalued and expected appreciation over the long-term. That is no problem as long as you know the explanation. Using LEAPS as our short call positions with covered call writing creates unnecessary complications especially related to lower returns and the risk of depending on long-term future price movement. I prefer selling options with shorter time horizons, but it’s worth mentioning since some others prefer the longer holding periods. Of course, closing both positions is also one of our choices. It wound up with the Conservative Party in the UK losing its majority in the House of Commons. Extremely high chance of win, little reward. Alan, Thanks for those answers last week, I sort of forgot you only rely on moving-averages rather than trendlines in your charts. Selling naked puts with leaps lets you gain even more guaranteed interest in your money market while the naked put option deteriorates. The 6-month charts point to a cautiously bullish outlook. I have become the ultimate chicken with credit spreads after being too aggressive with them originally. This week’s Weekly Stock Screen and Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Using buy/write combination forms closes both legs of the trade. If so then great, because that really expands my stock search opportunities from a $50 limit, up to maybe $200 like I suggested above. The bulk of QQQ is in the S&P. Collar Trades When Call Strikes Move Deep In The Money, Ask Alan #180 Using the Ellman Calculator to Determine “Hitting a Double” Results, BCI PODCAST 46 Should Delta Be the Sole Criteria for Covered Call Writing Strike Selection, BCI PODCAST 45 Implied Volatility and Expected price Movement During the Life of Option Contracts, https://www.youtube.com/watch?v=BN9ywexV2Po, Lesson 1: Beginner's Corner for Covered Call Writing: 2nd Edition, Lesson 2: Beginner's Corner for Covered Call Writing- 2nd Edition: Option Basics, Lesson 3: Beginner's Corner for Covered Call Writing- Stock Selection, Lesson 4: Beginner's Corner for Covered Call Writing-2nd Edition, Lesson 5: Beginner's Corner for Covered Call Writing, Lesson 6: Beginner's Corner for Covered Call Writing, Lesson 7: Beginner's Corner for Covered Call Writing: 2nd Edition, Lesson 8: Beginner's Corner for Covered Call Writing, Lesson 4:puts-selling-Common Sense Considerations, Lesson 5:puts-selling-Calculating Returns, Lesson 6:puts-selling-Executing Put-Selling, Lesson 8:puts-selling-Mastering Put-Selling, 11/21/2016: Sell the January 2019 LEAPS for $2.92, 11/28/2016: Share price declines to $15.26, 11/28/2016: “Ask” price for the LEAPS falls to $2.49. Please check your entries and try again. Before investing in financial assets, investors should do their own research and consult a professional investment adviser. Copyright ©2020 JJJ Investing - All Rights Reserved. As well, the term, writing covered calls, is the same as selling covered calls or as some investors refer to it, simply, covered calls. Establishing Our Cost-Basis for Long-Term Holdings, How to Select the Best Strike Prices for Collar Trades: Real-Life Example with Advanced Micro Devices, Inc. (NASDAQ: AMD), Poor Man’s Covered Call: Selecting the Best LEAPS Strike, Establishing Our Cost-Basis When Rolling Out-And-Up on 2 Different Days, Spinoffs and Stock Splits: How Multiple Corporate Events Can Impact Share Price, Free Resources including Ellman Calculator, Enhanced & Updated Beginners Corner Covered Calls. There is an old saying no one ever went broke taking profits. We live in sunny San Antonio, Texas USA where I am semi-retired (enjoying this investing business) thanks to many years of profits from the AIM system. This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. But I want to address your 1st reply next. You can view them at The Blue Collar YouTube Channel. If one were completely convinced of a bullish turnaround, we should consider selling out-of-the-money cash-secured puts before purchasing the security to give some downside protection. © 2020 The Blue Collar Investor. Now as these Blue-chips are normally quite expensive(as I can see) and if you say I could use ‘Select Sector Spyders’, or maybe whatever other ETF that is cheaper, then is it alright to just use 1 or 2 Blue-chip stocks and make up the rest of my portfolio value with some ETF’s? The Strategy. That means that those options expire every Friday. This matches precisely the stat shown on page 268 of the Complete Encyclopedia-Classic. You can Google these terms for more info. I use a figure of merit of 0.1% – .0.2% for determining when to unwind an ITM position so you can use the cash elsewhere. Selling covered calls with leaps keeps your cash tied up even longer. I’m a little concerned about the underlying fundamentals myself. Suppose you open 10 LEAPS contracts on APPLE. What I do not get is why does the author choose to buy an ITM put. Selling naked puts or buying LEAPs is an example of increasing your risk through leverage. In addition to the spread net debit, we are also incurring two unnecessary trading commissions. Institutions are net sellers in the dark pools (disposing of stocks off-market) while the options market has the stock market pegged due to gamma exposure. Gap Down case (Position OTM Out of Money): Notably a BABA JAN 22 and a FIT JAN 22. Remember the L=E-TV equation works only for unwinding ITM Buy-Write transactions. Using Monthlys will far supersede the returns of the 2-year LEAPS. Peter lives in The Netherlands. Fit is pennies right now so who cares but the BABA prems are juicy and I'm missing out. Subscribe to our e-mail newsletter or RSS feed to receive updates. A softer Brexit is less disruptive to UK business interests, With the economy on the upswing, European Central Bank president Mario Draghi announced on Thursday that the bank is dropping its bias toward cutting interest rates, but it retained its bias toward increasing quantitative easing, if necessary, The bank raised its growth forecast while at the same time cutting its inflation outlook. My friends know the market is my thing so they ask me about it. All Rights Reserved. Example: if Cost Basis is Strike 40, then 0.1% loss in closing is a time value of 0.04. Net gain = $210/$20000 = 1.05%. Here is an example. Jeffrey Weber and JJJ Investing Services are not an investment adviser and give only their personal view and opinion, never making any investment advice or recommendation to buy or sell specific securities. In our BCI methodology we favor Monthly or Weekly options for our short covered call writing positions. Minimal time value is a characteristic of deep I-T-M LEAPS options. A rise of 50% could translate into a 300% gain, but this strategy comes with risks and the odds are stacked against you. For your convenience, the link to the BCI YouTube Channel is: http://www.youtube.com/user/BlueCollarInvestor. The same guidelines apply when considering rolling options keeping in mind that even if option returns meet our goals, we still may need to close the short call at a favorable price so we don’t want the spreads too wide. West Texas Intermediate crude extended its decline to $45.50 from $47.35 a week ago after a forecast from the Energy Information Agency projected that US domestic oil output will top 10 million barrels a day in 2018. There is, however, one strategy for which I do like to use LEAPs… Traders who are familiar with the strategy of selling covered call options against their stocks – as a way to generate income – can do far better by owning long-term calls instead of the actual shares of stock and then selling short-term calls against the long-term position. I do not want to leave the impression I am disagreeing with the BCI Methodology, I strictly follow it. I am happy to take consistent small winners! Buying Leaps Calls as a Stock substitute. Early indications are that May’s failure to secure a larger parliamentary majority undermines the case for a “hard” Brexit. My plan in ‘slightly bearish markets’ would probably be to search through Blue-chips before the ETF’s rather than the other way round, – but I’m guessing it doesn’t matter which order comes first. 2- Yes, absolutely, a combination of stocks and ETFs is a valid approach. I have built cash too, added GLD and TLT exposure, bought a few index puts and sold some closer to the money calls. In the screenshot, we see a low OI for the expiration date shown but reasonable bid-ask spreads. He regularly trades with covered calls and more exotic option combinations. Last week I posted the fact that SINA was distributing 1 share of its holding WB for every 10 shares of SINA owned (10 per contract). . Another factor is that this trade is considered a long diagonal spread and not a covered call. If you sell a short term call against it, it is a diagonal spread which is also known as the Poor Man’s Covered Call. 0.22% of $5000 is $11.00. – Jay. I am concerned about the current political turmoil in the US how it may impact the stock market. I reference the Classic Encyclopedia below. Although we may have reasons for a future price recovery, it would be more desirable to wait for technical confirmation of those expectations. Rolling options might cost you some profit but remember if you have to adjust the position, APPLE also increased by 6% and your LEAPS will have increased significantly offsetting any loss you might have. between the Exercise Price (E) and the Time Value (TV) of an option: I have not seen this documented anywhere. On the same day I “bought” an equal amount of SSO – the 2x ETF on the S&P. Thanks very much. S = E + Int (Stock price equals Strike Plus Intrinsic) Subscribe Here - Have the latest blog articles sent to your inbox. I have been increasing cash but I still took a bit of a haircut on Friday. As a guideline, I like to enter my trades in the first day or two of a 4-week contract or the first week of a 5-week contract. That told me money did not leave the party. And that of course brings me to this next longer question, from something else that I had experienced in similarity to the above, using high priced-stocks, and well it goes like this:-, I could in all likelihood when ready use a $25,000 account value, where the maximum price is to be at just $50, and then wonder of this next situation when there simply aren’t any good stocks under $50 to even use. Emails: Buying the LEAPS call gives you the right to buy the stock at strike A. INTC- Deep ITM Calls. In the case where there is a Roll out scenario to the next month, we can ignore the OI and just roll it and continue with your profits. For a Strike of 50, set limit to 49.95, 40 – set to 39.96, etc. In the BCI methodology we use fundamental analysis, technical analysis and common sense principles and then make sure the security options will meet our goals and personal risk-tolerance. If mixed, we consider ITM strikes….these are guidelines. The way I select the LEAPS is that they are “at the money” or close to “at the money” when I buy them. GAP DOWN: You might also roll the calls up, buying to close the Feb 8 $48 calls and selling to open the Feb 22 $50 calls for a net debit of $1.05. I use only individual stocks generally, but during earnings season, I may turn to stocks and ETFs in my accounts. The call options which expire on November 13th (which is 1 week from now) with a strike price of 123 are selling for $55.0. 1. “Can I buy back the LEAPS to lock in a $43.00 per contract profit and then sell more LEAPS and if so, will I still be considered “covered” since I don’t have naked option-trading privileges. Comey said he would leave it to Special Counsel Robert Mueller to decide whether the president’s conduct rose to the level of obstruction of justice. Perhaps this is something you might want to consider to earn your profits sooner - and larger - with LEAPS. It is not necessary to have a full understanding as to how the formulas in the spreadsheet were developed. Because there is more time for the predicted stock move to play out, LEAPS suffer less from time decay. More questions to arrive soon. An interesting aspect to your approach to selling ITM strikes is where positions are closed at a slight loss (0.1% to 0.2%). I combine 4 accounts and keep track of the Cash and Reserved cash (for CSPuts) separately for each account by using as dummy accounts Money market funds which have a NAV of $1.00. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), remained historically low, slightly ticking up to 10.7. If the 1-month option is not exercised then you can sell another short-term option against your LEAP for the next month. Therefore, you can cash in some extra money almost every week. it works the same as it would for a covered call, (If you are not experienced and successful with covered calls then this article is not for you. Your ROO% is the TV / Strike price. If you sell 10 contracts you receive $550. S=Stock Price, C= Call Premium, E= Exercise Price 44. Selling short term out of the money options can be an extra boost to your AIM portfolio profits with no extra risk and when you get the hang of it is very easy to implement. Important to note: The watchlists/portfolios in Fidelity use the LAST PRICE of an option to calculate the account values. Net result: For an ITM Limit order, Opening Debit or Closing Credit, you are guaranteed a TV for the strike you selling or buying. That is one reason — along with a weaker pound — that markets have taken the election outcome in stride so far. If you think the stock is due for a little pull back but you don't want to sell the stock then sell a deep in the money call against it. The next step is to sell an out-of-the-money call against our Jan 2020 75 call LEAPS contract. Another option is to use a LEAPS call option as security for the covered call. As I write this it is November 6th 2020. So I place a Limit order of 40 – .04 = 39.96. TUR, one of the highly rated ETFs, had very low Open Interest for EF 7/21 for all strikes near it Last Price/. Now, it doesn’t always work out like this and sometimes you will have to adjust your position. Well, no options trader ever went broke selling covered calls. The OIC is offering four webinars this Thursday in their annual “summit”. Look for the report dated 06/09/17-RevA. [email protected] American Association of Individual Investors, “Using Stock Options to Buy Stocks at a Discount and to Bring Portfolio Returns to Higher Levels”, Co-presenter: Dr. Eric Wish, Finance Professor, University of Maryland. Selling in the money covered calls can be an excellent income generating strategy for those living off investments. the long call LEAPS). If technical parameters are all bearish, we move on. Japan’s composite PMI registered 52.6 and China’s 51.5, : 6/6- Buy signal since market close of April 21, 2017 (as of Friday morning). | Site Disclosure Statement | Glossary | Sitemap | Timeline. Interpreting the above and using the example in Figure 95, Pg. You can structure your investment with long-term equity anticipation securities (LEAPS) if you're bullish on a particular company’s stock. Peter has been investing and trading in options for over 15. lives in The Netherlands. For calls that gap down or trend down and are OTM, the TV decreases (Intrinsic=0) and you apply the 20% of the premium paid for the first 2 weeks and 10% rule to the 3rd week of 4 to determined when to Buy to Close your option and wait if you stock price regains its original price for you to STO a new option and hit a double. Isn’t it funny how those stories always turn out? CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG. That is 2.3% of your investment. . I am concerned about the current political turmoil in the US how it may impact the stock market. GMI: 6/6- Buy signal since market close of April 21, 2017 (as of Friday morning). Or alternatively, the limit is from Page 27, 56.79 – 6.90 =49.89 (Stock price – Premium to close). Alan, I could not agree with you more about OIC. NOT A PREMIUM MEMBER? Even though all the indexes are near record highs I don’t hear a lot of bullish euphoria out there! When our trades are placed does matter because we are undertaking short-term obligations (monthly in most cases, some use Weeklys). It will have a similar upside potential versus the stock and it has the potential to lose less, even far far less if the underlying collapses. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), remained historically low, slightly ticking up to 10.7. At both Optionshouse and Fidelity, I add the Intrinsic and Time values to watch lists and Position windows. -Jay. Thanks for subscribing! Great stuff! Position management is critical but there are many occasions when the best action is no action at all. Bernard Baruch said : “I made my money by selling too soon”. NEXT PAGE: Pros & Cons of LEAPS |pagebreak| INTC - Deep I-T-M Calls The January 2012 $10 strike is purchased for $10.60, $10.43 of which is intrinsic value and only $0.17 is time value. In that case it is possible to sell “out of the money” options against the LEAPS you own. A few answers to go over are:- So, let’s say we decide to sell the $100 strike for $2.36, or $236, against our $100 LEAPS … Yahoo.com watch lists I have found to be unreliable for this (has not worked for me – options do not get updated, though you can add them). If combining 4 accounts, you need 8 Mutual funds, which is no problem to find, using multiple companies. That Time value is guaranteed (before commissions) if it is filled. With the stock trading at $56.79 (now deep ITM) we exit at $49.89 ($50 – $0.11) using the same formula. – Jay. Unwind the position and free up cash to add more profits in a cycle with another security or roll up if confident in the same security (weeks 1, 2, 3 of 4) or B. keep your position to Exp Fri and roll out or roll out and up when premium is high (intrinsic value) with TV low or C. Let it get assigned because of an upcoming earnings report. I am using the real-life options chain on 12/20/2016 when SLV was trading at $15.06. Thank you for this follow-up post. If the original purchase was an ITM transaction, then the strike is your ROO Cost basis. He knew if his shoe shine boy was in the market it was time to get out! Back to the Time Value parameter when trading options, I have discovered an interesting relationship when trading ITM options. 1-month call: ($50.00/$1506.00) x 12 = 40% annualized, 25-month LEAPS: [($265.00/$1506.00)/25 ] x 12 = 8.4% annualized. Subscribe to this articles Comments via RSS Feed, Learn how to take a Screenshot so you can add it to your comment, Managing Great Stocks After Disappointing Earnings Reports, 50. If you get called out at $50, that will still be a decent profit. I do not know if is fact or fiction. I am looking at this strategy of selling weekly calls against long LEAP put options. When placing a Buy Write order and I know my time value, I just subtract the Strike price and get my limit price. Volume is a bit thinner, not uncommon for markets at all-time highs. But does this action benefit us? total loss for 500 shares is $30, still at 0.15% loss. Say you open 10 contracts at a strike price of 120 @ $23.00 for a total of $23,000. Exit strategies Must Be Timed Properly, 49. Options are A. Quite an improvement over the regular collar strategy. This means you have to roll your options to a higher strike price and/or an expiration date further in the future. Thank you Peter for this article - and also being fluent in English! Rolling Up in the Same Contract Month, 46. When we PURCHASE a LEAPS option instead of the underlying stock and then sell short calls (different strike and expiration) against that long position, it is known as a long call diagonal debit spread and will require a higher level of trading approval as Terry stated. Learn how to invest by selling stock options. The most common approach consists of buying in the money call LEAPS, while selling short-term out of the money calls against them, where both options have the same underlying security. He is also the owner and moderator for the Facebook group “Seven Figures Road.” We will provide a link to that group at the end of this article. Until it meets Open Interest requirements, I assume we should ignore it if we are opening up a new position. Like Covered Calls on Steroids I tell them to dollar cost average into index funds every month in their 401K’s and fund their IRA’s even if not deductible until they have the time and interest to study it more. I am frequently asked why I don’t utilize LEAPS options (expire 9 – 24 months in the future) to garner a much higher premium and perhaps require less management time. The primary difference between LEAPS and standard weekly or monthly options is time. Check out this link: https://www.thebluecollarinvestor.com/membership.shtml. Your total loss for the trade if $4.00 for 1 contract, if commissions are zero.. As many of you know, I have been presenting webinars for the OIC and participating in their panel discussions for the past few years and know and support the quality of the educational material they provide. I’m not sure whether we’ll see much of a bounce coming in on Monday as I expect more June contracts to be closing out throughout the week. 267, Strike = 50, Premium to close = 6.90, Stock price = 56.79, Intrinsic = 6.79, Time Value = 0.11 That means if you decide to Unwind, you will lose $0.11 per share or 0.11 / 50 = 0.22% of your Cost Basis. To send us an email, contact us here. 4. GAP UP case: (Position ITM or In-the-Money) As you explained and your formulas reflect, this is the same as $51.10 – $2.10. The brown field shows a 21% loss in share value during the past three months. This week’s reports and international news of importance: For the week, the S&P 500 moved lower by 0.30% for a year-to-date return of 8.62%. ... where it says ' by selling my puts "retail" - ' this should read 'by selling my weekly calls (or options) retail'. Trading using Alan’s methodology revolves around the Time Value TV of a trade. I remember the internet bubble of 2000. He regularly trades with covered calls and more exotic option combinations. A trading secret that we have been using, is to buy stock options with an expiration date longer than one year also known as LEAPS (Long-Term Equity Anticipation Securities). WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US. I waa as getting tips from my waiter in a restaurant that my bride and I frequented. Hopefully you may agree there’s no problem using a higher priced stock or two in combination with any number of ETF’s. (Pages 250-254, 257-260 of Classic Encyclopedia.). Maybe you could go out some way further, to reduce the risk of assignment, but still get a superior return on capital invested than applying this strategy by selling the 115 call against … To mitigate this risk when using LEAPs, would you consider selling your call a little further out of the money? Another way to view the trade is as a way to generate short term income (from repeatedly selling near dated calls) against a longer term asset (i.e. Something went wrong. Terry is also 100% correct that some brokerages will not allow this in self-directed IRA accounts but some are beginning to permit these. When we select a stock today that meets our system criteria, those parameters may not exist in the near or distant future and yet LEAPS imply taking a one-year or two-year obligation. Good work on the EA credit spread, You still have $4.46 cushion. The Q’s got a 2.5% haircut while the S&P barely budged. Dan recently sent me a covered call trade he executed with SLV (iShares Silver Trust: NYSE) using LEAPS as the short … We select an underlying security for multiple reasons. So when the book says “close to zero”, I had to quantify that to some value. This week’s reports and international news of importance: Prime Minister Theresa May’s attempt to improve her Brexit bargaining position by calling a snap election did exactly the opposite, increasing the uncertainty around the Brexit process, The Conservative Party lost its outright majority in the House of Commons but will be able to form a government with the backing of the 10 members of Northern Ireland’s Democratic Unionist Party, Politically, May could be replaced as party leader in the near future. . After one week of being in this position, buying back the short call and re-selling it will result in a net debit due to the spread (Buying at the “ask” costs more than the credit generated from selling the “bid”). Let’s look at the overall picture of this trade if we entered and exited with a buy/write combination form: With the stock trading at $51.10 and the $50 call generating $2.10, we would set a net debit limit order to open at $49 ($50 – $1) which matches your formula of E – TV. Our more experienced investors will love every printed word. Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. In my view, Monthlys provide the best combination of pros and cons although Weeklys can work as well. Thursday started with the European Central Bank meeting, followed by ex-FBI director Comey’s testimony later in the day. Interestingly they have tracked each other pretty closely which makes sense since the LEAP was half the price of SPY, was all intrinsic value and had no time value. Dan recently sent me a covered call trade he executed with SLV (iShares Silver Trust: NYSE) using LEAPS as the short call position. I would feel more comfortable (for example) with one $100 stock + 3 ETFs priced under $50…just an example. LEAPS Covered Calls . Risks to the economy are now broadly balanced, he said. Every time the market gets the fever, there is a certain period where there are great opportunities and plenty of money to be made, but you must be very vigilant during such periods, and heed the red flags, to leave the party before it is over. I am frequently asked why I don’t utilize LEAPS options (expire 9 – 24 months in the future) to garner a much higher premium and perhaps require less management time.
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