Generating 2% – 4% In Bull Markets: How To Take Advantage Of Out-Of-The-Money Stri

The 3 required skills for covered call writing and selling cash-secured puts are stock selection, option selection and position management. This article will use real-life examples highlighting the first 2 of these skill sets in a bull market environment.

Article assumptions and guidelines

• Portfolio is set up in a bull market environment
• Target goals for initial time value returns are 2% – 4%
• $50k cash available
• Select 5 different stocks in 5 different industries
• Adequate cash allocation
• 2% – 4% of total cash available reserved for exit strategy execution, if needed
• Premium Report dated 12/15/2017 for 1/19/2018 expirations is used for stock selection

Stocks selected

Selection guidelines achieved

• 5 different stocks
• 5 different industries
• Cash allocation near $10,000.00 per position (no single position dominates from a cash investment perspective)
• Adequate cash reserve ($2323.00) for potential exit strategy opportunities

Calculating Initial time value portfolio returns

Calculation guidelines achieved

Returns fall into our target 2% – 4% range (2.4%)

Establishing a significant upside potential bull market opportunity (3.6%)

Discussion

When targeting initial time value return goals (ROO) for our covered call writing portfolios of 2% – 4%, we are using these stats to set up the portfolios. Final results can be lower or higher. In bull markets we favor out-of-the-money strikes which offer the opportunities for share appreciation up to the strike price in addition to the option premiums…two income streams per position. In the real-life portfolio highlighted in this article, the average initial return (ROO) was 2.4% and the potential share appreciation averaged 3.6%. This created a portfolio with a possible 6%, 1-month return. Stock and option selection were discussed in this article but I would be remiss if I didn’t mention the importance of position management in our final returns. Also, two final points:

• The odd $94.95 strike for MKSI was a result of a contract adjustment after a corporate event
• Bid prices were used for the calculations. Leveraging the may have elevated the returns displayed

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Market tone

This week’s economic news of importance:

• NAHB home builders’ index June 68 (70 last)
• Housing starts May 1.301 Million (1.300 million expected)
• Building permits May 1.301 million (1.364 million last)
• Existing home sales May 5.43 million (5.52 million expected)
• Weekly jobless claims 6/16 218,000 (220,000 expected)
• Philly Fed June 19.9 (29.0 expected)
• Leading indicators May 0.2% (0.4% last)
• Markit manufacturing PMI June 54.6 (56.4 last)
• Markit services PMI June 56.5 (56.8 last)

THE WEEK AHEAD

Mon June 25th

• Chicago Fed national activity index May
• New home sales May

Tue June 26th

• Case-Shiller home price index April
• Consumer confidence index June

Wed June 27th

• Durable goods orders May
• Pending home sales May

Thu June 28th

• Weekly jobless claims through 6/23
• GDP revision Q1

Fri June 29th

• Personal income May
• Consumer spending May
• Chicago PMI June
• Consumer sentiment (final) June

For the week, the S&P 500 moved down by 0.89% for a year-to-date return of 3.04%

Summary

IBD: Confirmed uptrend

GMI : 5/6- Buy signal since market close of April 18, 2018

BCI: Favoring 3 out-of-the-money calls for every 2 in-the-money calls.

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a neutral tone. In the past six months, the S&P 500 was up 3% while the VIX (13.77) moved up by 40%.

Wishing you much success,

Original post

Written By: Dr. Alan Ellman