When protective puts are integrated into our covered call writing strategy it is known as the collar strategy. The covered call aspect of the trade generates cash flow and the protective put leg serves as an insurance policy against catastrophic share depreciation.
Theoretical return per contract for GILD example if share price and premiums remain constant. Advantages of this strategy. The advantages of this strategy are clear. A huge annualized return can be realized based on certain assumptions like share price and short call premiums remaining constant during the 6-month time frame. By selecting a 6-month put, the monthly cost of this protection is decreased compared to buying a put each month.
In addition to this, there is opportunity to generate additional profit if share price moves up to the strike of the short call. Potential pitfalls and possible disadvantages of this strategy. One of the disadvantages of weeklys is that we have 4 — 5 times the amount of trading commissions compared to monthlys. When do we breakeven? If share price declines we must be prepared for this we start losing money and we will not break even for 6 weeks.
What about management techniques? For traditional covered call writing we are managing two positions: In the proposed strategy, we are also managing the long put position. The investor must be capable of managing all 3 positions. In addition to this, if share price moves above the short call strike, we must roll the option in order to retain share ownership.
Rolling out and up may actually result in a short call debit. Rolling will also result in more trading commissions further eroding the profits from a theoretical trade. What about earnings reports? Two times within the 6-month time frame, there will be an earnings announcement. I strongly believe that a short call should not be written in those 2 weeks, thereby decreasing returns from the theoretical stats we archived above.
The strategy, however, does require us to retain the shares through these two earnings reports and that may result in a dramatic share decline if the report s is disappointing.
Of the three securities mentioned by Gary, IBB does distribute a quarterly dividend. Although unlikely, there is the possibility of early exercise, when expiration occurs after the ex-dividend date. Should the shares be assigned because of the ex-date, new shares would have to be purchased at the current market value and who knows how this would impact our theoretical returns.
There are ways to avoid early exercise resulting from ex-dates but that would involve sophisticated management skills and would not be guaranteed. What is the basis for selecting the underlying security?
For traditional covered call writing according to the BCI methodology a stock or ETF is chosen based on three factors: In this proposed strategy, it appears that the main criteria for selection is option returns and liquidity. Quantity seems to take precedence over quality. What about the 6-month time frame? We enter a trade today because certain system criteria are met such as those mentioned at the top of this article. By undertaking a 6-month obligation, we are making the assumption that those same positive factors will be in place for half a year.
We should at least be prepared that this may not come to fruition as shown in the chart below: There are many ways to make money in the stock and option markets. The proposed strategy may be one of those ways for certain investors. One key point is that there are no free lunches and every strategy has its advantages and disadvantages which must be evaluated before risking our hard-earned money.
To send us an email, contact us here. Subscribe to our e-mail newsletter or RSS feed to receive updates. Contact us by phone at Additionally you can also find us on any of the social networks below:. A fourth approach is to use them on weak tickers. The theory being if the market does go down, these will go down even more. And if the market goes up, these are less likely to go up as much. So in one scenario you gain more from them and in the other scenario you lose less.
My initial comment should also include that this strategy would also maintain the upside potential of the underlying stock, without using a covered call.
I have enjoyed reading this strategy very much and as collars are traditionally very conservative approach, I am eager to find out how you and the blue collar investor help me? You produce the weekly screen that is geared towards selecting the candidate for the monthly covered call. I would have thought that one would need something very similar to that for this new strategy, or modify this screen by having another column for the new strategy and the stocks that are suitable for collars would have a check in this column.
I feel that we need more than just candidate selection news letter as lot more is involved with this weekly strategy. This is not a new strategy proposed by the BCI team. It is a discussion of a strategy proposed by someone one of our members spoke with. We welcome additional comments like those from Steve and Gary. Now the good news is that the very same stocks and ETFs found in our weekly reports are also eligible candidates for selling weekly options with or without protective puts.
As far as which calls to sell and puts to buy, that is based on our weekly initial goals and the amount of protection we want to buy. The BCI team has plans to incorporate additional strategies into our educational products, the next one being put-selling, the topic of my next book, coming out this month.
But when I look at the options chains online, there are options expiring every week. Expiration dates can be universally distinguished by the date within the option ticker symbol. Not all securities have weekly options…most do not. For that matter, not all stocks and ETFs have options at all but many more have monthlys. For example, typing in expiration dates will bring you to this page among others:. I do have a question about the mid contract unwind exit strategy as I contemplate using this on LOW.
LOW had a gap up after earnings last week. I got lucky this time but will not take the risk in the future. In this case, the call option that I sold was OTM and had significantly more upside potential 4. If I compare the time value remaining 0. However waiting to collect the remaining time value would return only 0.
If I compare the time value remaining to the total of the original premium plus upside potential 0. The confusion is understandable.
I did not develop the mid-contract unwind exit strategy until after publication of the exit strategy book. Here we have an accelerating stock price glad you did so well…close call! Closing the position and selling the shares will allow you to take the cash and establish a new cc position and therefore a 2nd income stream in the same month with the same cash that should easily be more than 0.
What are your thoughts on the use of trailing stops? You may have covered that in a prior blog but I missed it. We are in a long stock and short option position. Owning the stock establishes our cost basis and gives us protection against catastrophic loss if share value appreciates dramatically. Therefore, if we are considering closing a position, the short call must be closed first.
Now once the short call is closed, selling the stock may not be the best choice. It may be re-selling the same option or rolling down. On the recent number of analysts raising the price target for Apple computer: Alan, When you speak of also having to manage the long put position, please could you elaborate? I am looking forward to reading your new book for Christmas. I have already started selling some puts on weekly options, rather than selling in the money calls.
I wish it were that simple but the reality is that we are in 3 positions with the proposed strategy: Long the stock and put and short the call. Now owning a put does not preclude the need for position management…situations can change. For example, the price of the stock may increase significantly which may lead to the mid-contract unwind exit strategy. If we close the long stock and short call, what do we do with the long put?
Perhaps we should sell it and generate whatever time value premium still exists? Maybe hold it if you think there could be a price decline.
If there is a price decline, put value will accelerate. Do the math…perhaps we should close all positions and move to a stronger financial soldier? The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates. Premium members will also receive their member discount. I should have the first several hundred copies in my possession by mid-December when shipping will begin…whew…just in time for holidays.
Check with your broker to see if they have any other guidelines but this is the norm…same as selling calls. Mail will not be published Required. Optionally add an image JPEG only.More...