1 How To Generate Monthly Cash Flow And Purchase Stocks At A Discount Using Two Low-Risk Option Strategies Covered Call Writing and Selling Cash-Secured Puts Hosted by: Dr. Alan Ellman President of The Blue Collar Investor Corp. www.thebluecollarinvestor.com alan@thebluecollarinvestor.com www.thebluecollarinvestor.com
Strategy Overview • Sell call and put options to generate monthly cash flow • Sell OTM puts to buy stocks “at a discount” • Sell OTM call options to enhance returns for a buy-and- hold portfolio • Use both covered call writing and put-selling to develop a multi-tiered option selling strategy • Zero-dollar collar to protect low cost basis stocks 2 www.thebluecollarinvestor.com
Three Essential Skills • Stock or ETF selection • Option selection • Position management 3 www.thebluecollarinvestor.com
Definitions ■ Call option- Gives the holder the right, but not the obligation to buy 100 shares of stock at a fixed price by a specified date. Call options will be used in the PCP (put- call-put) strategy ■ Option- A contract that gives the holder the right, but not the obligation, to buy or sell 100 shares of stock at a fixed price (called the strike price ) by a specified date (called the expiration date ). It is the right to execute a stock transaction. ■ Put option- Gives the holder the right, but not the obligation to sell 100 shares of stock at a fixed price by a specified date. 4 www.thebluecollarinvestor.com
“Moneyness” Of An Option Relationship of the strike price to the price of the stock Puts (Stock $/strike $) Calls (Stock $/strike $) • OTM ($32/$30) • OTM ($28/$30) • ATM ($30/$30) • ATM ($30/$30) • ITM ($28/$30) • ITM ($32/$30) 5 www.thebluecollarinvestor.com
Option Premiums In Relation To Stock Price • Premium = intrinsic value + time value • Intrinsic value = amount ITM (only for ITM strikes) • Time value: Total premium – intrinsic value • All premiums consist of time value only for ATM and OTM strikes 6 www.thebluecollarinvestor.com
Preview Example For Calls • Purchase 100 shares of Company XYX @ $48 per share = $4800. • Sell an option: sell someone the right to buy these shares for $50 per share during the next month. • You are paid a premium of $1.50 per share = $150. • This is a 3.1% 1-month return = 37% annualized. www.thebluecollarinvestor.com 7
PREVIEW SCENARIO I • At the end of the month, the stock price is less than $50; your shares are NOT purchased. • You keep your 3.1% 1-month profit and are free to sell another option. www.thebluecollarinvestor.com 8
PREVIEW SCENARIO II • At the end of the month, the stock price is above $50 per share and your shares ARE purchased. • You now make an ADDITIONAL $200 on the sale of the stock. • Total 1-month profit is $350 = 7.3% 1-month return = 87% annualized! www.thebluecollarinvestor.com 9
Real Life Trade With PRLB • 9/23/13: Buy 100 x $78.10 • Sell 1 x October $80 @ $3.30 = initial 1-month return of 4.2% • 10/8/13: BTC $80 call @ $0.45 (slightly above the 10% guideline) • 10/14/13: STO $80 call @ $1.40 (“hitting a double”) for an additional $95/contract credit • 10/18/13: Allow assignment as stock is trading above $80 and there was an upcoming earnings report on 10/31/13 • 10/19/13: Shares are sold for $80 for an additional $190 per contract (bought @ $78.10) • Total profit = $330 + $95 + $190 = $615 = 7.9%, 1-month return WWW.THEBLUECOLLARINVESTOR.COM 10
PRLB: 1-Year Chart WWW.THEBLUECOLLARINVESTOR.COM 11
PRLB: 1-Month Chart WWW.THEBLUECOLLARINVESTOR.COM 12
Summary Of Principles, Rules And Guidelines Used • Stock selection using fundamental and technical analysis as well as common sense principles • Option selection based on market assessment, chart technical and risk tolerance • Exit strategy execution using 20/10% guidelines • Expiration Friday decision based on earnings report rule WWW.THEBLUECOLLARINVESTOR.COM 13
Preview Example For Puts ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ www.thebluecollarinvestor.com 14
PREVIEW SCENARIO I www.thebluecollarinvestor.com 15
PREVIEW SCENARIO II • • • www.thebluecollarinvestor.com 16
3-Pronged Approach To Creating A High-Quality Watch List • Fundamental Analysis: Earnings and revenues • Technical analysis: Reading a price chart • Common sense principles (diversification) www.thebluecollarinvestor.com 17
Premium Stock Screen 18 www.thebluecollarinvestor.com
Premium Watch List 19 www.thebluecollarinvestor.com
Option Selection: “Moneyness” And Expiration (1-month) 20 www.thebluecollarinvestor.com
Covered Call Writing Returns 21 www.thebluecollarinvestor.com
Put-Selling Returns 22 www.thebluecollarinvestor.com
Factors That Influence “Moneyness” Decisions • Identify our goal • Overall market assessment • Chart technicals • Personal risk tolerance • Calculations meet our initial goals (2-4%/month) 23 www.thebluecollarinvestor.com
“Moneyness” For Puts • First establish goal (income only, buy @ discount, use with ccw) • *OTM- Most conservative ($32/$30) • ATM- More aggressive ($30/$30) • ITM- Most aggressive ($28/$30): exercise most likely 24 www.thebluecollarinvestor.com
“Moneyness” For Calls • OTM- Most aggressive ($28/$30): highest potential returns • ATM- Aggressive: highest initial returns ($30/$30) • ITM- Most conservative ($32/$30) 25 www.thebluecollarinvestor.com
Integrating Both Strategies: PCP Strategy 26 www.thebluecollarinvestor.com
27 www.thebluecollarinvestor.com
28 www.thebluecollarinvestor.com
First Q&A About 15 minutes www.thebluecollarinvestor.com 29
WWW.THEBLUECOLLARINVESTOR.COM 30
31
WWW.THEBLUECOLLARINVESTOR.COM 32
WWW.THEBLUECOLLARINVESTOR.COM 33
34
15 minute break www.thebluecollarinvestor.com 35
Portfolio Overwriting • Enhance the returns of a buy-and-hold strategy • To increase by 6% per year, our goal is ½% per month • Use out-of-the-money strikes to allow for share appreciation www.thebluecollarinvestor.com 36
Advantages • Generate a constant, guaranteed monthly cash flow • Downside protection in bearish markets • Most retail investors are granted this level of trading approval • Can be used as an additional monthly source of income www.thebluecollarinvestor.com 37
Disadvantages • Early exercise may result in tax consequences • Share appreciation is limited by the strike price • Learning curve • Modest time commitment www.thebluecollarinvestor.com 38
Why Is Early Exercise So Rare? • Call buyer can keep cash in an interest-bearing account until the last minute • Call buyer exposed to greater risk because stock price > option price • Loss of time value of option- call buyer makes more money selling the option www.thebluecollarinvestor.com 39
What If Stock price > Strike Price By Expiration Friday? • Easy to avoid exercise and sale of shares • Roll the option: buy back current month option and sell the next month option prior to 4PM EST • Roll out- same strike • Roll out and up- higher strike www.thebluecollarinvestor.com 40
Early Exercise And Dividend Distribution • Ex-dividend date close to expiration Friday • Call strike is in-the-money (lower than stock price) • The dividend is > time value of the option www.thebluecollarinvestor.com 41
How To Avoid Early Exercise • Access ex-dividend dates • www.dividendinvestor.com • Sell option the day after the ex-date • Sell a 2-month option www.thebluecollarinvestor.com 42
Ex-Dividend Date For AXP www.thebluecollarinvestor.com 43
Guidelines For Avoiding Early Exercise • If the ex-date is in the 1 st week of a contract, sell the option the next day • If the ex-date is later in the contract, sell a 2-month option after expiration of the previous contract www.thebluecollarinvestor.com 44
Assumptions For Practical Application • Long-term buy-and-hold portfolio with shares at a low cost basis • Goals to generate higher returns and avoid exercise • Roll options if strike is ITM by expiration • Sell options the day after the ex-dates in the 1 st week of a contract • Sell 2-month options if later in contract • Our goal is an additional 6% per year www.thebluecollarinvestor.com 45
Home Depot: Ex-Date www.thebluecollarinvestor.com 46
Home Depot: 1-Month Options Chain www.thebluecollarinvestor.com 47
1-Month Returns • $41/$8044 = 0.51%, about ½% • Share appreciation potential to $83= • $83 - $80.44/$80.44 = 3.1% www.thebluecollarinvestor.com 48
Home Depot: 2-Month Options Chain www.thebluecollarinvestor.com 49
2-Month Returns • Goal is now 1% to annualize to 6% • Goal is about $0.80 • Choices include the $82.50 strike @ $1.06 and the $85 strike @ $0.44 • With multiple contracts use 1/2 of each to average to 1% • If a single contract favor the lower goal for less need to roll the option www.thebluecollarinvestor.com 50
Recommend
More recommend
