Portfolio Overwriting in High Implied Volatility (IV) Markets + Alan’s Wealth365 Webinar Registration Link

One of our covered call writing-like strategies is portfolio overwriting. The strategy involves selecting deep out-of-the-money (OTM) strikes that will generate lower returns than traditional covered call writing but also decreases the likelihood of exercise (our shares being sold). The returns will still be significant when annualized, while still enhancing the probability of avoiding exercise and retaining the shares.

 

Basis of strike price selection

Since share retention is a priority goal, we will select only out-of-the-money strikes with Deltas between 0 and .50, the closer to “0” the better. Next, we must determine what our annualized return goal is over-and-above typical share appreciation and dividend income. Let’s say our portfolio is appreciating 6% per year plus an additional 2% per year from dividend distributions. We may set a goal of an additional 6% per year for a total average annualized return goal of 14%. If we are using Monthly options, that would compute to 0.50% per-month. If we are using Weeklys, it would result in a 0.12% weekly initial time value return goal.

 

Can we set our monthly goal from 1/2% per-month to 1 1/2% in high IV conditions?

This is tempting but the strike in normal market conditions that generates 1/2% is quite different from the strike that will generate 1/2% in high IV conditions. We must keep in mind our stated portfolio overwriting mission of retaining the shares.

 

Option premiums in high IV markets

The time-value component of option premiums is directly related to implied volatility. If IV increases, as it did in April of 2022, the corresponding option premiums will also rise.

 

Delta in high IV markets

Since the expected trading range for high IV securities is much greater than that of normal market conditions, the Deltas of the corresponding strikes will also increase as the probability of expiring with intrinsic-value is enhanced. Therefore, the strikes must be adjusted higher to preserve stated goal of a low probability that the strike will expire ITM.

 

Real-life example for a 1-month expiration for Microsoft Corporation (Nasdaq: MSFT): ($272.99)

MSFT: Option-Chain on 4/22/2022

 

  • To achieve a return of 1 1/2% of $272.99 or about $4.09 ($4.00 brown cell), we would look to the $295.00 strike which has a Delta of 24.88% (pink cell), about a 25% probability of expiring ITM and resulting in exercise with no exit strategy intervention
  • To achieve an initial return of 1/2% of $272.99 or about $1.36 ($1.12 and $1.59 in the yellow cells), we would look to the $310.00 and $315.00 strikes which have Deltas of 11.77% and 8.97%
  • Our investment decisions and trade structuring depend on these 2 factors

 

Discussion

Portfolio overwriting has 2 main stated goals. We seek to generate lower but significant annualized returns while establishing a low probability of the option expiring ITM. In high IV market environments, we may be tempted to use similar strikes we would have selected in normal market conditions, but Delta will play a role in making such decisions higher risk.

Click here for a related article.

 

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Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

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Upcoming events

1.Wealth365 Investor Summit

Thursday October 13, 2022 (this coming Thursday)

Register for free here

Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow

The PCP Strategy (Put-Call-Put or “wheel” strategy)

Hosted by:

Dr. Alan Ellman, President of The Blue Collar Investor Corp.

Barry Bergman, BCI managing Director

Selling stock options is a proven way to lower our cost-basis and beat the market on a consistent basis. Two such low-risk strategies are covered call writing and selling cash-secured puts. This presentation will detail how to incorporate both strategies into one multi-tiered option-selling strategy where we either generate cash-flow or buy a stock at a discount. I refer to this as the Put-Call-Put (PCP) Strategy, also referred to as the wheel strategy.

The basics and pros and cons are discussed as well as a real-life example and introduction into the BCI PCP Calculator. This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to beat the market on a steady basis while focusing in on capital preservation.

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October 30th – November 1st, 2022

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Visit Alan, Barry and members of the BCI team at Booth # 415

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Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions

Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*

 

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Detailed start-to-finish 6-part program

This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:

  • Section I:
    • Option basics
  • Section II
    • Traditional put-selling
  • Section III
    • PCP (wheel) strategy
  • Section IV
    • Buy a stock at a discount instead of a limit order
  • Section V
    • Ultra-low-risk put/Delta strategy
  • Section VI
    • Ultra-low-risk put/Implied volatility strategy

This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.

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Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

  • Normal to bull markets
  • Bear and volatile markets
  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.

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November 10th -11th, 2022

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Alan speaking at a Money Show event

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