Upload
phungngoc
View
214
Download
1
Embed Size (px)
Citation preview
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
www.thebluecollarinvestor.com
1
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 stockswww.thebluecollarinvestor.com 2
Three Essential Skills
• Stock or ETF selection
• Option selection
• Position management
www.thebluecollarinvestor.com 3
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.
www.thebluecollarinvestor.com 4
“Moneyness” Of An OptionRelationship of the strike price to the price of the stock
Puts (Stock $/strike $)
• OTM ($32/$30)
• ATM ($30/$30)
• ITM ($28/$30)
Calls (Stock $/strike $)
• OTM ($28/$30)
• ATM ($30/$30)
• ITM ($32/$30)
www.thebluecollarinvestor.com 5
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
www.thebluecollarinvestor.com 6
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
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
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
Factors That Influence “Moneyness” Decisions
• Identify our goal
• Overall market assessment
• Chart technicals
• Personal risk tolerance
• Calculations meet our initial goals (2-4%/month)
www.thebluecollarinvestor.com 23
“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
www.thebluecollarinvestor.com 24
“Moneyness” For Calls
• OTM- Most aggressive ($28/$30): highest potential returns
• ATM- Aggressive: highest initial returns ($30/$30)
• ITM- Most conservative ($32/$30)
www.thebluecollarinvestor.com 25
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
Guidelines For Avoiding Early Exercise
• If the ex-date is in the 1st 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 1st week of a contract
• Sell 2-month options if later in contract
• Our goal is an additional 6% per year
www.thebluecollarinvestor.com 45
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
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
Summary
• Portfolio overwriting is a low-risk way of enhancing portfolio value
• In non-sheltered accounts, avoiding exercise is important if the cost basis is low
• Dividend distribution is the main reason for early exercise
• Covered call writing limits share appreciation to the strike
www.thebluecollarinvestor.com 51
Summary to Master Option-Selling
• Must master all 3 required skillsStock selection: (fundamental analysis, technical analysis,
common sense principles)Option selection: (“moneyness”, expiration date, returns
meet goals)Position management: (bullish and bearish scenarios)
www.thebluecollarinvestor.com 54
Covered Call Writing And Put-SellingGenerate Monthly Cash Flow using Two Conservative Option Strategies
Hosted by:Dr. Alan Ellman
President of The Blue Collar Investor Corp.
www.thebluecollarinvestor.com
www.thebluecollarinvestor.com
62