| Executing Your First Covered Call TradeThe Blue Collar Investor

Option trading and covered call writing, in particular, have become increasingly popular over the past several years. As our membership has been growing more than ever, we have a large number of Blue Collar Investors who are relatively new to the process. This article will analyze a real-life covered call trade example with The Cheesecake Factory (Nasdaq: CAKE), taken from one of my portfolios

Select a stock or ETF from our watch list

• On 6/18/2024, CAKE was an eligible security on our premium Weekly Stock Screen and Watch List
• Based on the current price-per-share, I will purchase 300 shares and sell 3 covered call contracts

Go to broker platform (Schwab, in this case) to purchase the shares

• Ticker symbol (CAKE) is entered
• Enter buy 300 shares
• Market order, day only
• Check estimated amount to make sure there is adequate cash available (red arrow)
• If all looks good, place order (not shown here)

Go to the options link of the broker platform to sell the (3) options

• The strategy is “call”, and we want to Sell to Open”
• 3 contracts
• $40.00 strike
• 7/19/2024 expiration
• The “bid” price is $1.30 (small red arrow)
• Make sure this return aligns with our pre-stated initial time-value return goal range
• Enter limit order at $1.30 (could be up to $1.35- below the midpoint)
• Day order
• For the 3 contracts, $390.00 (minus small commissions) will be sent to our cash account, once executed (seconds)
• After reviewing the order, it is placed, and we check to make sure that the trade has been executed. This takes seconds

Set up our 20%/10% buy-to-close, good-until-cancelled limit order to protect against share price decline

• Buy-to-close option limit order is set for 3 contracts at $0.26 (20% of $1.30)
• If the $0.26 threshold is reached, it will cost $78.00 to close the 3 contracts, minus tiny trade commission
• This will be changed to $0.13 (10% of $1.30) with 2 weeks remaining on the monthly contract

Calculating our initial returns

• Our Trade Management Calculator (TMC) shows a 32-day return of 3.27%, 37.29% annualized (brown cells)
• There is an additional potential of 0.60%, if share price rises to or beyond the $40.00 strike price (purple cell)
• The breakeven price point is $38.46 (yellow cell)

Discussion

To view the recording of these real-life trades, as I executed them, click here.

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BCI Expected Price Movement Calculator

The Expected Price Movement Calculator is designed to generate an approximate projected trading range for the underlying security, specific for the selected contract expiration date. The at-the-money implied volatility (IV) of the stock or ETF (exchange-traded fund) is used to achieve this valuable information.

Inherent in the spreadsheet is a conversion formula that recalibrates the annualized IV stat into one specific for the contract being traded. Easily accessed option-chain data is entered into the white cells at the top of the spreadsheet and calculations will appear in the yellow cells below.

This tool will yield upper and lower ends of the trading range during the option contract being traded with an approximate 84% probability of accuracy.

To view the video and to purchase the BCI Expected Price Movement Calculator, click here.

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Premium Membership Price Increase Notification: No Rate Increase for Current Members

On September 1, 2024, BCI will be raising membership rates for new members only. This will not apply to current members. It has been 3 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and ETF reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.

This price increase will not apply to current active members as you are grandfathered into the current rate for life or as long as your membership remains active. This is our loyalty pledge to you.

The increase for new members will go into effect on September 1, 2024, as follows:

Monthly: $19.95 for the first (trial) month and $69.00 each 30-days thereafter (currently $57.95).

Annual: $778.95 for the first 13 months (includes a reduced first month and a free last month) and then $828.00 every 13 months thereafter (includes 1 free month). Currently $657.40 and $695.40.

All new members who subscribe between now and 8/31/2024 will be grandfathered into the current rate and will see no price increase on 9/1/2021.

Thanks to all our loyal members for your support over the past 17 years and for putting BCI on the financial map.

Click here for member benefits video.

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Your generous testimonials

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

Alan, thank you soooo much for your responses. Your personal attention and willingness to help members have exceeded my expectations. I will be a forever premium member and also have passed your name along to many others that are interested in options trading. Thanks again

Sincerely,

TOM

Upcoming events

1. Mad Hedge Investor Summit

Tuesday September 17, 2024

11 AM ET – 12 PM ET

Zoom webinar.

Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks

Increasing profits and avoiding tax issues

Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we potentially increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”.  

Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.

Traditional covered call writing will also be discussed to demonstrate comparisons between the 2 strategy approaches.

Topics discussed

Summary

Brief review of covered call writing

Option basics

What is an option-chain?

Option selection

Calculating covered call returns: Real-Life examples

Portfolio overwriting defined

Basics of strike selection

Pros and cons of portfolio overwriting

Why early exercise is so rare

Rolling options

Role of dividends

Locating ex-dividend dates

How to avoid early exercise

Avoiding earnings reports

Practical applications: Delta, implied volatility, annualized returns

Real-life examples with calculations

BCI Trade Management Calculator

Registration link to follow.

2. Stock Traders Expo- live event in Orlando Florida

October 17 -20

• 2-hour Covered Call Writing Masters Class

• All Stars of Options class on Portfolio Overwriting

Details to follow.

3. American Association of Individual Investors/ Los Angeles Chapter

November 9, 2024

12 PM ET – 1:30 PM ET

Private webinar for members of this AAII investment club

4. Young Investors Club: University of Central Florida

Wednesday November 13, 2024

Private investment club

5. BCI-Only Webinar

Zoom

Thursday November 21, 2024

8 PM ET – (:30 PM ET

Covered Call Writing Dividend Stocks

Details & registration link to follow.

6. Long Island Stock Investor Group Part I

Zoom

February 13, 2025

7:30 – 9:00 ET

Details to follow.

7. Las Vegas Money Show

February 17 – 19, 2025

details to follow.

8. Long Island Stock Investor group Part II

March 13, 2025

7:30 – 9:00 ET

Details to follow.

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