| How to Use the CEO Strategy with Inverse ETFs in Extreme Bear MarketsThe Blue Collar Investor
The CEO Strategy is a covered call writing-like strategy, a streamlined approach to covered call writing. It is an acronym for Combining ETFs with Stock Options. It involves using only the 11 Select Sector SPDRs as underlying considerations and reduces the number of covered call writing exit strategies from 14 to 4. This article features detailed information as how to utilize this user-friendly and time-efficient approach to covered call writing in extreme bear market conditions like we experienced in 2008, 2017 and 2022. For this approach, we turn to inverse ETFs.
What are inverse ETFs?
These are exchange traded funds that use derivatives to profit when market indexes decline. When a market benchmark declines in value, these securities appreciate.
4 Inverse ETFs appropriate for the CEO Strategy
- ProShares Short Dow 30 (Nasdaq DOW)
- ProShares Short QQQ (Nasdaq: PSQ)
- ProShares Short Russell 2000 (Nasdaq: RWM)
- ProShares Short S&P 500 (Nasdaq: SH)
Option-chain for SH on 3/25/2024
With SH trading at $11.90. the $12.00 out-of-the-money (OTM) 4/19/2024 strike generated $0.10 per-share. Open interest was strong at 586 contracts.
Portfolio set-up input information for a $100k portfolio with 4 securities: The BCI Portfolio Setup Spreadsheet
The spreadsheet guideline for exit strategy cash reserve range is $2,000.00 – $4,000.00 (yellow cells).
Initial and final portfolio setups
- The spreadsheet (top half) shows a shortfall of $493.00 with no cash reserve for exit strategies (red numbers)
- We will reduce DOG from 900 to 800 shares (red arrow)
- The revised spreadsheet now has a cash reserve of $2,367.00 (bottom right)
Initial calculations using the inverse ETF CEO strategy using the BCI Trade Management Calculator (TMC)
- Initial trade data is entered from the option-chains into the blue cells (top section)
- Yellow cells: Breakeven price points
- Brown cells: Initial and annualized returns based on 26-day trades
- Purple cells: Additional upside potential cash % returns if share value appreciates from current market value up to, or beyond the OTM strikes
- Bottom section shows total portfolio initial returns of 0.78% ($757.00) with a possibility of $2,824.00 (2.89%), if all shares move up to the 4 OTM call strikes
- These are 26-day trades
Discussion
In extreme bear markets, the CEO Strategy can be implemented with Inverse ETFs. The BCI principles of diversification, cash allocation, trade execution and management still apply.
The Blue Collar Investor’s Guide to:
Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts
This book will detail how to enter, manage and calculate trade adjustments for all market conditions. After we select the underlying security and sell the corresponding option, we immediately move into position management mode. There are over 20 exit strategies defined, as well and when and how to implement these plans.
The BCI Trade Management Calculator facilitates the analysis of each exit strategy by showing initial trade entries, initial trade calculations for both each individual trade as well as that of the entire portfolio. From there we learn how to enter our trade adjustments and finally to calculate trade and total portfolio post-adjustment results.
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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,
Just wanted to let you know that you are such a great teacher That I am able to sell covered calls and manage my trades so well that I don’t even need to do an analysis when the market moves. I just do what instinctively needs to get done according to the rules of the strategy.
Lastly, I have taught my 21-year-old son how to do this, and I’m convinced he is going to be at least independently wealthy or at best a millionaire by the time he is 35. I can’t thank you enough. Xoxoxo.
Joanna
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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
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