How To Generate Monthly Cash Flow And Purchase Stocks At A Discount - - PowerPoint PPT Presentation

▶
how to generate monthly cash flow and purchase stocks at
SMART_READER_LITE
LIVE PREVIEW

How To Generate Monthly Cash Flow And Purchase Stocks At A Discount - - PowerPoint PPT Presentation

Apr 03, 2023 131 likes •766 views

1 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.

slide-1
SLIDE 1

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 alan@thebluecollarinvestor.com

www.thebluecollarinvestor.com 1

slide-2
SLIDE 2

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 stocks

www.thebluecollarinvestor.com 2

slide-3
SLIDE 3

Three Essential Skills

  • Stock or ETF selection
  • Option selection
  • Position management

www.thebluecollarinvestor.com 3

slide-4
SLIDE 4

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

slide-5
SLIDE 5

“Moneyness” Of An Option

Relationship 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

slide-6
SLIDE 6

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

slide-7
SLIDE 7

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

slide-8
SLIDE 8

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

slide-9
SLIDE 9

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

slide-10
SLIDE 10

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

slide-11
SLIDE 11

PRLB: 1-Year Chart

WWW.THEBLUECOLLARINVESTOR.COM 11

slide-12
SLIDE 12

PRLB: 1-Month Chart

WWW.THEBLUECOLLARINVESTOR.COM 12

slide-13
SLIDE 13

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

slide-14
SLIDE 14

Preview Example For Puts

∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙

www.thebluecollarinvestor.com 14

slide-15
SLIDE 15

PREVIEW SCENARIO I

www.thebluecollarinvestor.com 15

slide-16
SLIDE 16

PREVIEW SCENARIO II

  • www.thebluecollarinvestor.com

16

slide-17
SLIDE 17

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

slide-18
SLIDE 18

Premium Stock Screen

www.thebluecollarinvestor.com 18

slide-19
SLIDE 19

Premium Watch List

www.thebluecollarinvestor.com 19

slide-20
SLIDE 20

Option Selection: “Moneyness” And Expiration (1-month)

www.thebluecollarinvestor.com 20

slide-21
SLIDE 21

Covered Call Writing Returns

www.thebluecollarinvestor.com 21

slide-22
SLIDE 22

Put-Selling Returns

www.thebluecollarinvestor.com 22

slide-23
SLIDE 23

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

slide-24
SLIDE 24

“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

slide-25
SLIDE 25

“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

slide-26
SLIDE 26

Integrating Both Strategies: PCP Strategy

www.thebluecollarinvestor.com 26

slide-27
SLIDE 27

www.thebluecollarinvestor.com 27

slide-28
SLIDE 28

www.thebluecollarinvestor.com 28

slide-29
SLIDE 29

First Q&A

About 15 minutes

www.thebluecollarinvestor.com 29

slide-30
SLIDE 30

WWW.THEBLUECOLLARINVESTOR.COM 30

slide-31
SLIDE 31

31

slide-32
SLIDE 32

WWW.THEBLUECOLLARINVESTOR.COM 32

slide-33
SLIDE 33

WWW.THEBLUECOLLARINVESTOR.COM 33

slide-34
SLIDE 34

34

slide-35
SLIDE 35

15 minute break

www.thebluecollarinvestor.com 35

slide-36
SLIDE 36

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

slide-37
SLIDE 37

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

slide-38
SLIDE 38

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

slide-39
SLIDE 39

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 >
  • ption price
  • Loss of time value of option- call buyer makes more

money selling the option

www.thebluecollarinvestor.com 39

slide-40
SLIDE 40

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

slide-41
SLIDE 41

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

slide-42
SLIDE 42

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

slide-43
SLIDE 43

Ex-Dividend Date For AXP

www.thebluecollarinvestor.com 43

slide-44
SLIDE 44

Guidelines For Avoiding Early Exercise

  • If the ex-date is in the 1st week of a contract, sell the
  • ption the next day
  • If the ex-date is later in the contract, sell a 2-month
  • ption after expiration of the previous contract

www.thebluecollarinvestor.com 44

slide-45
SLIDE 45

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

slide-46
SLIDE 46

Home Depot: Ex-Date

www.thebluecollarinvestor.com 46

slide-47
SLIDE 47

Home Depot: 1-Month Options Chain

www.thebluecollarinvestor.com 47

slide-48
SLIDE 48

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

slide-49
SLIDE 49

Home Depot: 2-Month Options Chain

www.thebluecollarinvestor.com 49

slide-50
SLIDE 50

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

slide-51
SLIDE 51

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

slide-52
SLIDE 52

Using a Zero-Dollar Collar to Protect Low Cost Basis Stocks

www.thebluecollarinvestor.com 52

slide-53
SLIDE 53

www.thebluecollarinvestor.com 53

slide-54
SLIDE 54

Summary to Master Option-Selling

  • Must master all 3 required skills

Stock 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

slide-55
SLIDE 55

www.thebluecollarinvestor.com 55

slide-56
SLIDE 56

www.thebluecollarinvestor.com 56

slide-57
SLIDE 57

www.thebluecollarinvestor.com 57

slide-58
SLIDE 58

www.thebluecollarinvestor.com 58

slide-59
SLIDE 59

59

slide-60
SLIDE 60

www.thebluecollarinvestor.com 60

slide-61
SLIDE 61

www.thebluecollarinvestor.com 61

slide-62
SLIDE 62

Covered Call Writing And Put-Selling

Generate Monthly Cash Flow using Two Conservative Option Strategies Hosted by:

  • Dr. Alan Ellman

President of The Blue Collar Investor Corp. www.thebluecollarinvestor.com alan@thebluecollarinvestor.com

www.thebluecollarinvestor.com 62