Covered call writing is a strategy we use to generate consistent monthly cash flow, re-invest profits and ultimately to become financially independent. We strive to beat the market by using sound fundamental, technical and common sense principles.
But why are we getting paid more than treasuries, CDs or money market accounts? The answer is that we are generating these high returns for undertaking risk. The whole basis of the BCI methodology is to undertake modest risk and mitigate that risk through a series of guidelines and principles set forth in our books and DVD Programs.
That was a rhetorical question…deep down inside we all know that there is no legal way of accomplishing that goal. Recently, I responded to a comment made by Tony and felt it was worthy of a blog article because of the impressive thinking that went behind the inquiry as well as the lessons learned.
Tony used his knowledge of the advantages presented to us of using in-the-money strikes. We can generate a time value component of the option premium which represents our initial profit and also have an insurance policy to protect that profit in the form of the intrinsic value component of the premium… intrinsic value protects the time value.
The chart below shows the time value components for in-the-money and near-the-money strikes for FB:. Eventually, they would wise up and such trades would no longer exist. We trade in markets, hopefully we all trade in fair market conditions. This is what gives us our edge in this low-risk, but not no-risk, strategy. Click for more information and registration. Economic news continues to be mildly positive as it has for the past few years as recovery and expansion continues to support our stock market:.
Moderately bullish selling an equal number of in-the-money and out-of-the-money strikes. 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:. I bought Cashing in on Covered Calls in and have completely switched my retirement strategy to Covered-Calls. Only through my intro to covered calls are we able to lease a very nice condo in Cancun.
So, I owe you a great deal Alan. So enough for now, thanks again for your support. The Weekly Report for has been uploaded to the Premium Member website and is available for download. Alan, I have found some stocks off the last running list to papertrade, and have now come across some more things to enquire about to you below. The Beta stats on the running list when compared to yahoo-finance look a bit different sometimes. Some of the shares of around the same value I see have different strike price gap differences, and wondered why this could be?
Also when contemplating whether to do a CDMP strategy on any particular stock you say that I should look at the price performance comparison first. I have some more questions to come, just to go back over the stock returns subject again.
Thanks for your help. This may be more appropriate for a longer-term investment strategy. I use the latter when the stock is significantly under-performing the overall market. This is a more general chart compared to using the 4 technical parameters we use in forming our stock watch lists and determining our strike price selection. As far as chart formats are concerned in this latter situation, I prefer bar charts but many of our member like candlesticks, also a useful format to use.
Either one will suffice. There are many ways to use the stock list to populate our portfolios when there are more than our typical 40 — 60 candidates. When you refer to an average 5. This is an excellent return, whether from call premium or stock appreciation. What are some of the stocks? If you could say more about the stocks you are using and your strikes relative to price I am certain many of us would be grateful — Jay.
Feel free to use the info if you find it useful. Thanks again for your early assistance. The email below was in response to a recent question submitted by one of our Premium Members, Ivar. We thought that the details would be interested to our wider audience…. Wow…this is really an interesting question.
Ichimoku cloud charts are fairly complex and provide much of the same information that the standard BCI chart set up provides. These are well known and tend to show much of the same information as the 9, 26, and 52 day trend lines that the ichimoku charts show. In the process of determining overall trend, you can simply draw a trend line and see much of what the cloud shows.
This is essentially the same information that you get from the price chart being above, inside, or below the ichimoku cloud. If you want to use a faster moving average to follow your trades, you can add a faster EMA.
To be effective using the BCI methodology, you only need the 20 day and the day EMAs to visualize the trends and their strength. The multiple moving averages and trend lines in the ichimoku methodology will, in my personal opinion, trend to be confusing unless you have had detailed training in using the tool and over-complicate the BCI system.
Support and resistance levels are used by virtually every trader who uses technical analysis and you can get the same information from them as you would from the various ichimoku plots. When stocks are trending, MACD is a key tool in determining the strength and momentum of the trend. In a sideways market, stochastics give you important information on price position relative to being over bought or over sold when moving averages and MACD are less useful. In , when the first work on ichimoku clouds were first published, there was much less volatility in the market.
OK…so where are we? I think I am still having a tendency though to use the close prices for comparing price performance, as this is what Martin Pring TA expert had showed example charts of in a book I have. Thanks for clarifying that question. If you then write the next month but at a strike still below your original purchase and the stock rises, you can roll until above original share price.
It becomes a game of buying back and either rolling at same or higher strike until capital is recovered? For establishing accounts outside the US, look into the following: As far as managing a stock that has gapped down, rolling down and writing OTM strikes is one way to manage that scenario. I ask myself…is the cash contained in that position best served in that same stock or another?
Sometimes that is the best move to make and put the cash in a better performer. Alan, I have here below the questions I promised to ask you about stock returns. And if at the end of the month any particular stock you hold has given a total negative month return of a few percent maybe from rolling down , then how likely is it that you will use this same stock s again the very next month contract?
I do have another longer question to maybe finish off this topic for me so will ask another time. This guideline can be adjusted for your personal risk tolerance. We have members who are much more aggressive than I am…one size does not fit all. Each month a stock is evaluated on its own merit.
I may keep a stock that was a losing position the previous month if, for example, it out-performed the overall market. The question I ask is where is the cash currently obligated to this stock best situated? In the same stock or another? If there is a better candidate, move your hard-earned money to a better place.
There is no change is stock evaluation from the system you are familiar with. In a bull market, I will be more aggressive and vice-versa. Mail will not be published Required. Optionally add an image JPEG only.
The Blue Collar Investor Learn how to invest by selling stock options. Since the time value component of premiums is greatest for at-the-money strikes, the cost to close will most likely result in an options debit despite the impact of theta time value erosion mid-contract There will also be a small debit from the bid-ask spread, less of a factor than the option time value debit Time value components for different strikes for FaceBook The chart below shows the time value components for in-the-money and near-the-money strikes for FB: Time value of different strike prices.
About Alan Ellman Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.
Connect With Us To send us an email, contact us here. Additionally you can also find us on any of the social networks below: A Cause for Concern? Alan, I bought Cashing in on Covered Calls in and have completely switched my retirement strategy to Covered-Calls. Premium Members, The Weekly Report for has been uploaded to the Premium Member website and is available for download. John, When you refer to an average 5. John emailed his response to me: We thought that the details would be interested to our wider audience… Ivar wrote: Adrian, Thanks for clarifying that question.
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