Monthly Income from Covered Call Options

well welcome everybody thanks for being here good evening good morning good afternoon wherever you may be in the world I appreciate you being here my name is Tim Burkin I'm the co-founder of Trader interviews and also the Traders Expo uh we have a great presentation for you today Allan Elman from the blue collar investor is here uh I met Allan a little over a year ago and I approached him to be a speaker at the Traders Expo and uh from the moment he stepped into this Workshop room he was one of the most popular speakers at the Expos and so um his website's become very popular as well and he's got some great information for us today about covered call writing uh Barry is also in the room you won't probably hear from him but he will be answering your questions in the question box so if you have any questions while this is going on Barry can answer all of those in real time while you're watching Allen's presentation so I will uh answer the first question which is always is this being recorded yes it is you'll get the link in your inbox uh sometime late tonight or early tomorrow morning so you can watch this over and over again to your heart's content so I will turn it over to you alen thanks very much for being here well thank you very much Tim and thanks to all of our guests for attending tonight's uh webinar uh my topic is creating a monthly cash flow with cover call writing uh to those of you new to this strategy cbet call writing is a strategy that encompasses two other strategies first stock ownership which I'm sure you're all familiar with and the other one is option selling and I want to highlight the word selling in because that implies that we're going to be receiving a cash premium for undertaking an obligation and that is precisely what coved call writing does it creates a monthly cash flow so that being said let me start with the typical disclaimer that you're all used to seeing and you're going to see lots of Trades that I've made using this strategy in tonight's presentation and I want you to know that those trades were appropriate at the time that I made them but may or may not appropriate today so use this information for educational purposes only now that being said let me get started with a preview example so once I give you all the basic and advanced principles for covered call writing all that will come alive having this preview example in the background and what we're all going to do now is we're going to purchase 100 shares of stock it could be any company we'll call it company XYZ and we're going to purchased that at $48 per share so our cost basis or our investment is $4,800 now once we own these shares and we're in a protected or covered position we are then free to sell the option what we're doing here is we're selling someone the right but not the obligation to purchase these shares from us at a price that we determine by a date that we determine and in return for undertaking this obligation we are paid a cash premium that the market determines now in this hypothetical we're going to purchase the shares for $48 and agree to sell them for $50 at any time over the next one month now a typical premium in a situation like this would be about a150 per share or $150 for the 100 shares now a $150 initial profit on an investment of $4,800 represents a 3. 1% one month return if we could do that every month that annual rizes to 37% now at the end of that one month

there were two possible major outcomes in the first scenario let's assume for a moment that the price of the stock never supersedes the agreed upon $50 sales price let's say for example it just remains at 48 well the option holder is not going to opt to exercise that option and buy our shares for 50 when they can be purchased at market for 48 so the option expires worthless we keep the $150 no matter what I want to get that out up front that's our cash to keep no matter what happens in this scenario the option expires worthless we keep the $150 we still own the stock and now we're free to sell another option the next month so our one month profit is 3. 1% on the option side the other possible scenario is the price of the stock does go past the $50 agreed upon sales price folks even if it's one penny over the $50 those Shares are going to be sold unless we take some action which I'll discuss later on but let's assume for a moment that we take no action and we allow our shares to be sold for $50 at the end of the one month well now we've made an additional $200 on the sale of the stock for a total of $350 150 from the sale of the option and 200 stock from 4 8 to 50 that's a total of 7. 3% one month return now if we could do that every month that annualize out to 87% but let me tell you right now that not every trade every month is going to turn out like that but in normal market conditions you will see trades like this and you won't be amazed it will happen now despite whatever strategy you decide on you need to be able to talk the talk so there are some definitions that you need to be familiar with there aren't a lot let's review them briefly first of all an option is a

contract it gives the holder the right but not the obligation to buy or sell 100 shares of stock at a fixed price that's called the strike price and it was $50 in the preview example by a specified date and that's called the expiration date most options expire on the third Friday of the month now a call option gives the right to buy 100 shares of stock at a specified price and in tonight's webinar we're only going to be dealing with call options what we're doing here folks is we are selling the right but not the obligation for some unknown person because everything is done online to buy our shares from us at a price that we determine by a date that we determine and in return for undertaking this obligation we are paid a cash premium that the market determines and that cash is generated into our account instantaneously and available for us to use either right at that moment or the next day depending on which brokerage you're using now a put option is the op opposite it's the right to sell 100 shares of stock at a specify price we will not be dealing with put option in tonight's webinar all right let's talk for a moment about the option strike price remember that's the price we agree to sell our shares for as it relates to the price of the stock we have three definitions here at the money that's where the strike price of the call option is the same as the market value of the stock so for example we buy a stock for $50 and agree to sell it for $50 Believe It or Not folks we're going to get paid for that the in the money strike is the one that's the most difficult to understand and one of the most underused strike prices we're going to talk about that a lot in tonight's webinar because understanding how to use the in the money strike price I promise you is going to put cash in your pocket in this case the strike price of the option is lower than the market value of the stock so for example we purchase a stock for 56 and agree to sell it for 50 now you say why would we agree to do that well the answer is the option premium that we're going to receive for selling this option will compensate us for that $6 difference plus a little bit more that little bit more represents our profit not the $6 we're going to lose from selling the stock and I'll show you an example in just a moment and that's called the in the money strike price now the out of the- money strike price which is the one we gave in our preview example is the most popular of all the strike prices used in covered call writing the example we gave we buy a stock at 48 and agree to sell it for 50 now the reason it's the most popular is because you have an opportunity to generate cash not only from the sale of the option but also from share appreciation so it's a very bullish position to take and the most popular of all the covered Co strike prices so we have two more definitions now and before we get into them I'd like you to take a look at the equation at the bottom of this screenshot the option premium or the cash generated from the sale of the option consists of intrinsic value plus time value now intrinsic value is the amount that the option is in the money so therefore only in the money strikes have intrinsic value the example we gave before was you buy a stock for 56 and agree to sell it for 50 so if you got an $8 premium for selling that option that of that $8 $6 is intrinsic value not profit that's the amount the strike price $50 is in the money compared to the $56 price of the stock so of the $8 $6 is intrinsic value not profit leaving us $2 of Time Value our initial profit okay so if you sell an in the money strike you cannot count the entire premium as profit what you'd be doing then is exaggerating your results and we don't want to do that all right so we're going to see some examples of this as the webinar progresses so if you didn't quite grasp that we will be showing it to you a few times more so selling covered calls is buying a stock and selling call options on a share for share basis if you want to sell one options contract you must first own 100 shares of stock if you want to sell five contracts you must own 500 shares of stock now if you own let's say 199 shares of IBM you can only sell one options contract so therefore when you purchase shares for purposes of covered call writing you always purchase them in 100 share

increments now before you invest and risk your hard-earned money you have to have reasons why you're doing it and the reasons shouldn't be because I said so or because some Screaming guy on TV said so or some newsletter told you to do it should be because you've educated yourself and you've made a non-emotional decision that this is the right strategy for you now on this slide I've listed nine reasons why I use covered call writing and I'm going to discuss four of them the ones that highlighted first of all the lowrisk strategies that I've tried I get the highest rate of return so simply stated more cash as a result of using this strategy number four one of the things I love is I love to be able to control my outcomes and this strategy gives you unbelievable flexibility in terms of your final results I've actually written an entire book on the subject of exit strategies for covered core writing so once you enter your position there are ways that you can navigate through situations where the share price declines or the share price goes through the roof or if the price of the stock is higher than the strike price as the contract is about to expire and you may want to hold on to that stock and we're going to discuss that towards the end of this webinar AR so control is a major factor in why I like this strategy number six you can compound your cash in minutes let's say hypothetically you have a nice size portfolio of $300,000 and I know many of you going to have a lot less and some more but let's for this hypothetical say $300,000 and each month you write covered calls and generate $10,000 in cash now you could take that $10,000 instantaneously purchase more shares with that money and then immediately sell options on those newly purchased shares thereby compounding your money in minutes I know of no other strategy where you could do that and number nine on this list is that the government considers this strategy safe enough where it allows you to use it in your self-directed Ira accounts and whenever possible I advise you to do so because you're going to be generating a constant monthly cash flow and we don't need Uncle Sam as our partner while we're doing that now many of you have attended

webinars seminars and the speaker would tell you about a strategy or a software program and made it sound like it was a Panacea nothing can go wrong uh normally when you're getting paid more than a risk-free return there are some disadvantages there is a downside there is risk so I always like to include this slide in my presentations and let you know so you could assess for yourself whether this is the right strategy for you now let me State the obvious if the price of the stock declines below the break even you could start losing money let's go back to our preview example we purchased the stock for 48 and we sold the $50 call option for $150 if the price of the stock starts to decline below 4650 we could start losing money now we're going to have a whole series of exit strategies in place to mitigate these losses but I want you to know right up front that there is some risk and the risk is in the stock not in the sale of the option now the major disadvantage of covered call writing is number to so I would ask you to focus in on this one the profit potential is limited to the strike price of the option and let me explain let's go back to our preview example we purchased the stock for 48 and sold a $50 call let's assume for a moment now that there's some kind of an FDA approval on a drug that the company owns and all of a sudden the stock goes from 48 in one week it goes to 60 now we are obligated ated to sell at 50 and we we'd love to get our hands on those extra 10 points but we can't because of our option obligation so our profit potential is limited to the strike now as you saw in the preview example we did generate better than a 7% one month return not so bad so as I say on the slide don't get greedy focus in on what your strategy is in this case it's covered called writing what are your goals and if you've met your goals or exceeded your goals as you would have in this case pat yourself on the back for making a great trade take the cash and move into a new position number three assignment that means that the option holder exercises the option and buys your shares from you now 99. 9% of the time that will not happen until the Saturday after expiration Friday however there are some rare exceptions to that and I want to make you aware of it h mainly the exception would be if there is a dividend distribution and if that dividend is greater than the time value left on that option premium your shares may be sold the day before the ex dividend date now what does that mean to me it means nothing because of course you've maxed out your covered call trade and now all of a sudden mid contract you have all this extra cash in your account which you could use to establish a second income stream in the same month with the same cash but some of you out there may want to hold on to that stock and if so there are ways of avoiding early exercise and we'll get into that a little bit later on and it goes back to that tremendous amount of control that I alluded to before and number four and I think this probably applies to any strategy that you want to master there is a learning curve and a time commitment now for those of you relatively new to the strategy if you are motivated to learn it and master it figure three to four months before you should feel comfortable risking your hard-earned money on this relatively conservative strategy and when I use the word master folks I am talking about three levels above being pretty good at it okay so one thing we all have in

common now is we want to know how to maximize our profit how do we make the most money here are a few ideas first of all if you're going to use this strategy you're going to be making a lot of Trades buying stocks you're going to be selling options you're going to be buying back options and it's going to seem um a little intimidating at first because it did to me too when I was teaching myself this strategy but once you've mastered it will become very much second nature to you I promise you that but you're going to need to use an online discount broker not a full service broker because you don't want the commissions interfering with your profit percentages so uh I have actually uh have a file of online discount brokers that charge very low fees and that are relatively reliable that have been recommended to me by our members and folks that have attended my seminars over the years and at the end of the webinar I'll show you how you can uh get a free copy of this file if possible as we said before use sheltered accounts so Uncle Sam isn't your partner as you're generating this monthly cash flow now when you're establishing your positions you're going to need to use both fundamental and technical analysis as well as some of the Common Sense principle that I'll be discussing with you shortly in other words you don't decide on using either fundamental or technical analysis or common sense principles we're going to use all three and finally we're going to have a series of exit strategies in place to mitigate losses and sometimes turn losses into gains and sometimes even maximizing our gains

so let's first talk about fundamental analysis and I'm certainly not here tonight to tell you how to fundamentally analyze the stock but I'm happy to share with you how I do it as it relates to covered cool writing now over the years I've had the most success using the Investors Business Daily IBD what used to be the 100 list which came out on their Monday Edition a few years back they streamlined that to the IBD 5050 list so even though that's a great starting point it doesn't give you enough stocks to screen to end up with a watch list which I'm comfortable with which is 40 to 60 stocks so we need to use other resources and I list some of these in my books and DVDs uh one of them would be ibds can slim but there are many others uh the BCI team also has a database of over 3 th000 stocks that we've identified over the years as great covered call writing candidates so each week we screen the IBD 50 list plus that database of over 3,000 stocks and present the list to our premium members of 40 to 60 equities to consider for covered call writing but this is a process that you could also do by yourself now once we've screened that IBD 50 and our database or other resources then we run them through another IBD screen called the smart select ratings which basically is fundamental and Technical not only for the stock but also for the industry that stock resides in and IBD will give you both letter and numerical ratings for these six categories but you can actually screen very quickly because adjacent to that is what they call a checklist and it's six circles either green yellow or red green means the best performers in each category so when we screen the smart select we require all six of those circles to be green and then it will pass that screen if not the stock is no longer considered and the final fundamental screen we use is the MSN scouter rating which is a risk reward what they've done here folks is they've taken 10 years of historical data they've Quantified it into equations and ended up with a ranking system 1 to 10 and here's what it means the higher the number the more likely the stock is to outperform the S& P 500 over the next six months and with the least amount of volatility now in the BCI methodology we require a scouter rating of five or

higher so let's now talk about some of the Common Sense principles um most of which you'll see no place else but is an integral part of the BCI methodology as it relates to covered core writing and the most important one is the first one and most of the uh the points that I make with our methodology I call guidelines because I like to give our members some flexibility but this first one I call a rule never ever sell a covered call option if there's an upcoming earnings report prior to expiration Friday and you'll see when I show you what one of our premium reports looks like that we highlight this in our report so our members can't make a mistake about this there's way too much risk and if you get burnt by an earnings report then you could lose your entire month's profits from covered call writing so we want to avoid that now in that same regard there are about 70 companies that trade on us exchanges that report same Store retail sales on a monthly rather than a quarterly basis and these reports act almost the same as earnings reports so all 70 of these stocks are banned from consideration and this is another file that we have for our members and I'm happy to share with all of you folks attending this webinar tonight and once again at the end of the webinar I'll tell you how you can obtain a free copy of this file we require a minimum trading volume of 250,000 shares per day and no stock or industry should represent more than 20% of your total portfolio and the last Common Sense principle relates to the cash allocated per position now if you owned a $15 stock and $115 stock and you had the same number of shares in each one you'd be much more heavily weighted in the more expensive of stock we want to equ we want to give approximately an equal amount of cash to each position so let's say hypothetically you had a $50,000 portfolio and you were going to uh select five stocks well then you would want to allocate approximately $10,000 per position and in my books and DVDs I show you how to do that but generally speaking you don't want to be too heavily weighted in any one position

okay we're moving along nicely tonight let's talk a little bit about technical analysis now again I'm not here tonight to tell you how to technically analyze your stocks you may have favorite parameters you like to use the only thing I would heavily recommend is that you use the same parameters the same time frames on each chart so when you plug in that ticker symbol you'll be able to evaluate a chart in two to three seconds now for those of you who have my books I show you how to set up a technical chart my first book caching and uncovered calls and that's on page 85 and those of you who have my latest book the encyclopedia for covered core writing I dedicate three pages to that 71 to 74 and it shows you how I set up a technical chart but the first thing I look at is the moving averages or I take a look at the chart pattern of a stock is it trending up down or sideways and I use two moving averages here the 20-day and the 100 day moving average now if we want to show positive upward momentum we're always going to want that shorter term moving average to be above the longer term moving average so here you see the Blue Line represents the 20-day and EMA means exponential moving average and uh those of you new to technical analysis that simply means that more weight is given to the more recent prices so you get a quicker change in moving average which is important to our only one month obligation so what we'd like to see is an uptrending chart which we have here we'd like to see the shortterm blue line above the longer term Redline moving average so that passes and finally we'd like to see the price bars or candlesticks whatever you prefer to be at or above the shortterm moving average and we have that so this is a very bullish moving average uh chart here now as I said and in tonight's webinar we don't have time to get into details but uh I do in my books and DVDs get into uh great detail on how to set up a chart but generally speaking let me just mention the other parameters to you uh underneath the moving average which is at the top part of the screenshot we have the macd which stands for moving average convergence Divergence and it's the subtraction of two relatively short-term moving averages and again we'd like the shorter term to be higher than the longer term so we want the macd to be above zero and that's that thick black line you see in the middle of the screen now the red line that's surrounding that black line is the actual moving average of the macd itself and once again we'd like the macd to be above its moving average and with you subtract the moving average from the macd it could be Quantified in bar chart form those blue bars you see so even if you know nothing about technical analysis all you need to know here is you'd like those bars to be above zero which you could see they are and you'd like them to be ascending which you could see they're not they're actually descending so as far as the macd goes here it's a mixed macd picture now underneath that we have the stochastic oscillator 3/4 of the way down and you see here the black line represents this the stochastic oscillator and what that tells you is where is the price of the stock today compared to its previous 14 trading days and once again we'd like to see it ascending but you see here it's actually descending of late and it's broken below the 80th percentile which is a bearish signal so I don't want you to worry too much about that tonight but just to let you know that we have a bearish stochastic oscillator and the last parameter we use is the volume bars at the bottom now we use volume to confirm the trend or the moving averages so if you have an upward moving average but a declining volume like you see here that could red flag there's going to be a change in the trend so I said a whole lot but what this all means is that we have a mixed technical picture here and if and we're going to use this stock for covered core writing now here's the important part folks I'm more likely to use an in the money strike which will give me protection of the time value of my option premium and we're going to show you how that works a little bit later on but all of this works together if we had a completely bullish technical chart I'm more likely to sell an add of the money strike and I'll show you what a bullish chart looks like a little bit later on this one happens to be a mixed chart now here's what page one of our

premium report we produced for our premium members and I just want to show you the screening process that we just discussed you could see at the blue bar at the top the symbol the company name and the rank uh if it's in the IBD 5050 or if it comes from other resources the recent price now only about half the stocks have options associated with them so if a stock does not have options associated with them obviously you cannot use it for covered call writing and the rest of the screens you see here relate same Store retail sales the band stocks the smart select is the fundamental and Technical screens minimum trading volume and so on you work your way into the technical analysis and earnings reports now when I get an email from my team that the report has been published on our premium site I immediately turn to the middle of the report which is the

running list or you folks would know it as a watch list we call it a running list because it's in a constant state of change every week it'll change a little bit and you could see here Google at the top is in a gold row and that means it's reporting earnings that particular contract cycle so it's not eligible even though it passed all the screens it is not eligible for covered call writing until the earnings report passes and you can see we give the dates the projected dates of the earnings reports the name of the industry so you don't accidentally use more than 20% in your portfolio and much more information like the rank and other things like the beta or the historical volatility of the stock and dividend yield so it's a lot of information in the report but the main thing is the first page the screening process you must use as I said before fundamental analysis technical analysis and Common Sense principles that we went over so at this point in time what we've accomplished is we've created a watch list of the greatest performing stocks in the greatest performing Industries but one thing is noticeably missing we haven't made any money yet and that's what we're all here for tonight how do we generate that monthly cash flow well in order to find out how much cash we could generate from selling options on those great performing stocks we must first access an options chain now this is simply a list of options prices for a particular Equity whatever brokerage you're using is going to have this information but there are many free sites also like finance. and you're going to see many of my trades uh showing options chain from that site uh cboe. com is another one there are many free sites you can access for options chain information put in the ticker and then look for the options link so this being the first options

chain we're going to look at let me just point out certain parts to you and then in the future ones we'll just go right down to the dollars and cents so on the column to the left uh we put number one over it that's the strike price column those are the prices that you can agree to sell your shares for now the stock we're looking at is Nuance Communications ticker symbol NN you could see I circled in red on the upper right that the current market value at the time that I made this trade was 2407 now went down to the $25 out of the money strike remember higher than the current market value and let me just take a look now at column two which is the ticker symbol of the option and you'll see certain characteristics You'll Always Find in that ticker symbol of the option first of all the ticker of the stock nuan then the expiration date you'll notice a c right in the middle that means call option as opposed to put option and then the strike price so all that information will be there now the older option symbology is a lot different and I'll show you some examples of that very shortly now let me take you before we get into the actual dollars and cents over to the last column uh we put down as number three it says open interest that's the amount of open contracts for that particular option so let me tell you the BCI guideline as far as whether to use a particular option we want to have an open interest of at least 100 contracts and or a bid ask spread of 30 cents or less okay so let's take a look now at the bid and the ask columns you see what that means the bid column is the lower of the two prices we always sell at the bid the lower and buy at the ask the higher the market makers pocket the difference so they couldn't care less if we're buying or selling or winning or losing they still pocket the difference between the bid and the ask and that's called the bid ask spread in this case for nuance the bid is 75 cents the ask is 85 cents so the spread would then be 10 cents so you could see here that it does meet a BCI guideline as a matter of fact 12,000 open interest contracts and a bidis spread of 10 cents okay let's do the math we're going to generate $75 per contract from selling one options on Nuance on a cost basis of 2407 that represents approximately a 3% one Monon return now if Nuance goes from 2407 up to the $25 strike we've now generated an additional $93 in cash on the sale of the stock that represents a approximately another 4% profit so in this case we have the possibility of a 7% one month return I want to remind you that the initial profit is time value only if we sold an in the money strike you'll see an example shortly we can we don't count the entire premium only the time value of that premium here's Apple way back when it was 20593 so let's take the strike column to the left and we go down to the 210 out of the money strike you'll notice by the way that strike prices move in $10 increments above 200 $5 increments below 200 you'll also notice that the symbology for the option is different uh the reason I leave it in my seminars and webinars is that if you happen to read a book on options published before 2010 you're going to see the these older type ticker symbols okay let's make some money here the 210 strike price the bid column is $815 that means you're going to get $815 minus commissions so let's say about $85 cash generated into your account from the sale of that option now on a c basis of 20593 that represents approximately a 4% one mon return now if Apple goes from 20593 up to the strike price of 210 we've now generated an additional $47 cash or approximately another 2% so in this particular example we had the possibility of a 6% one Monon return here's Tupperware selling at 4414 scrolling down to the 45 out of the money strike we generate $185 cash or approximately a 4% one Monon return and again if Tupperware goes to the $45 strike we've generated an additional $86 in cash or approximately another 2% so similar to the Apple example in this case we have the possibility of a 6% one Monon return now I want you to relax about the

math because at the end of the webinar I'm going to tell you all how you can get a free copy of the element calculator it's a calculator I wrote the equations for which will do all the math for you so you will be able to figure out what your initial return is what your upside potential is for additional share appreciation and what your protection is of the time value if you sell an in the money strike so let's actually put this calculator to work let's take a look at the bottom row that I highlighted in yellow for viit and at the time I did this trade viit was trading at 1873 and looking at the out ofth money $20 strike we see the option generated 90 cents or $90 per contract now when you use the calculator you fill in the blue cells with the information that you've accessed from an options chain and all of the calculations will automatically appear in the white cells to the right so let's take a look at this trade for viit intrinsic value none because this is an outof the- money strike not an in the money strike upside yes a127 what that means is we have the possibility of the price of that stock going from 1873 all the way up to the $20 strike and that and if that happens we would generate an additional $127 per contract so the return on our option or Rue is 4. 8% that's $90 divided by1 1873 that's our initial return if the price of the stock goes up to $20 we've now generated an additional 6. 8% so we have the possibility here of generating an 11. 6% one month return now as far as downside protection of the option profit zero now that's very different than Break Even we do have a break even which is always the price of the stock minus the total premium but in the BCI methodology we're not interested in Break Even we're interested in generating time value profit and then protecting that profit so the only time you have downside protection of the time value is when you selling in the money strike so an example of that would be the row right above that price of the stock is still 1873 and the 1750 in the money strike again lower than the current market value is selling for 2115 now we can't count that entire 215 as profit because we're going to be losing A123 on the sale of the stock that's the intrinsic value you see that column there that gets filled in automatically the calculator will do that for you so the123 is subtracted from the 215 and that gives us a return on our option of 5. 3% upside potential none because we're obligated to sell at 1750 the price of that stock can go to a gazillion we're still only going to get 1750 however we do have protection of that time value because we are guaranteed a 5. 3% profit as long as that stock does not go below 1750 so we can go from 1873 to 1850 to 1825 all the way down to 1750 and we're still guaranteed a 5. 3% one Monon return so what that line means is the following we guaranteed the 5. 3% one month return as long as the Share value does not depreciate by more than 6. 6% by expiration

Friday now here's a strategy I use in my mother account I sell covered call options on exchange traded funds now an ETF is a mutual fund that behaves like a stock and many of them have options associated with them the advantage of an ETF is you need less cash to get started because you have instant diversification there's also less management we're not worried about earnings reports Etc so those are the advantages of ETFs the disadvantage is because you're dealing with a basket of stocks there's less volatility in the underlying security and therefore the option premiums are lower so the goals are less for ETFs than they are for individual equities for example my goal with individual stocks is two to 4% a month my goal in my mother's account with ETFs is 1 to two% a month so let's take a look at the ETF for the q's that's on the NASDAQ 100 you could see at the time on the upper right that this security was trading at 4585 scroll down to the $46 strike and by the way you'll notice that ETFs normally trade in $1 strike prices and you'll see that the bid column shows 87s so let's feed that into the element calculator and you'll see that the initial return on the option the ru is 1. 9% with a possibility of another 0. 3% so here you have a possibility of a 2. 2% one Monon return still not too shabby but not as high as what you can generate from Individual equities so you should know the pros and cons of using ETFs versus individual stocks now I took this screenshot actually on a day that I was actually trading and you could see on the upper right uh kind of fenced in with that green box there uh two stocks I was looking at swi and bwld and I put in three different strike prices for each now I just want you to kind of zero in on the right side there you see the return on the option upside potential downside protection now if I was bullish about the market and the chart technicals were bullish I would look to get still my goal of two to 4% in the root column and then something that gave me some pretty Nic looking upside potential so I might look at that BW ld90 strike which gave me 2. 3% initial return with the possibility of another 5% if the price of the stock goes up to the strike price and that would be an example of a bullish position to take now let's say I was concerned about the market it was a little volatile you know uh things going on in Europe whatever our government with the sequestration and all that so I'm a little concerned I might want the downside protection so I might go towi I35 strike which gives me still in very nice one month return of 2. 3% with a 5. 5% protection of that profit again that's not the break even all right so depending on what your outlook is on the market depending on the chart technicals you could make an intelligent non-emotional decision and you're still getting a great return and strike price selection will bring your returns to the highest possible levels so here we go managing your

covered call positions doesn't start after you enter your position starts before and we've talked about this the stock selection process fundamental technical analysis and Common Sense principles like earnings reports industry diversification cash allocation trading volume all the things we talked about just common sense now the last two items I'd like to discuss with you in the time we have remaining are strike price selection very important and I'll briefly go over with you a couple of exit strategy examples remember we have three strike

prices to choose from in the money at the money and out of the money so let's talk about the pros and the cons and in the money strike we gave the example you buy a stock for 56 you sell the $50 call option now this is the most conservative way to approach covered call writing I use this strategy for in the money strikes when the technicals are mixed and the market is bearish or volatile because you have the protection of the profit because of the intrinsic value of the option protects the time look at it like you have an insurance policy on your position and the best part about it is that insurance policy is paid for by the option holder not by us and again the downside is you have no chance of any appreciation of the stock but in a volatile or bearish Market that's the strike price you should heavily consider the at the money strike is the one that will give you the largest initial profit but will offer you no downside protection of that profit or any upside potential and the last one which is the most popular the outof the- money strike the example we gave you bought the stock at 48 and agreed to sell the $50 call use that when you're bullish on the stock and General market conditions are favorable so General speaking use the outof the- money strike whenever possible but if market conditions or chart technicals dictate switch over to the in the money strike so let's take a look at this chart and see what strike price we might want to consider we could see the moving average very bullish uptrending short-term blue line above the longer term Red Line price bars at above at or above the shortterm moving average we see an ascending macd histogram those blue bars above zero and ascending we see the stochastic oscillator that thick black line three4 of the way down ascending we see volume confirmation of all of those bullish signals we have a very bullish chart here for swi I'd be more likely to sell an out of the- money strike when I see a chart pattern like this one let's look at the options chain on that particular stock when the price was 3703 now you could see the open interest was well above 100 contracts and the bid ask spread was uh 30 cents or less it it's could be either one it doesn't have to be both now let's focus in on three strike prices the in the money 35 the slightly out of the money 3750 I couldn't find one that was exactly but that's close to an at the money just slightly out of the money and the way out of the money 40 so let's take those bid column 285 14555 and feed it into the element calculator on the upper right part of your screen here and you can see we put the stock price the option prices in here and in the white cells you see the results so let's say for example that I was a little bearish on the market I have a lowrisk tolerance I want some protection what am I going to do I'm gonna opt for the 35 in the money strike that's given me a very nice 2. 3% one- Monon return with a 5. 5% protection of that profit not the break even let's say I was bullish on the market and of course we just saw a very bullish chart I might opt for the slightly out of the money 3750 which gave me a beautiful one Monon return of 3. 9% with a possibility of another 1. 3% so here we have the Poss possibility of a 5. 2% one Monon return and that's how we do it we plug the numbers into the calculator you could print out this sheet when you're ready to start making your trades you say to yourself is my market assessment bullish or bearish is my personal risk tolerance high or low what did the chart look like and you could make a very well-informed non-emotional decision on which strike price to use okay so let's uh briefly just touch

upon some of these exit strategies and uh this is such a critical part of CB call writing that so few covered call writers use what most covered call Writers Do Is they buy the stock sell the option and then hope for a happy result at the end of the month you could mitigate losses you can enhance gains there's so much you could do to bring your profit level from so to oh my God and that's what I want for you so I break up exit strategies into two segments the first half of the contract cycle and the onor near expiration Friday so if the price of the stock is declining you could use the rolling down strategy where you buy back the option and sell a lower strike in the same month that'll give you some downside protection and generate additional cash into your account and in my material I give you examples of how to do this hitting a double you could tell I'm a baseball fan uh is where you buy back the option on a stock that's declined and then wait for it to bounce back and sell the exact same option in the same month I'm going to show you an example of that there's a strategy where the price of the stock goes so high that you can actually buy back that option at no cost to you and then sell the stock and use the cash to set up a second income stream in the same month with the same cash it's a beautiful thing when you can do it and it's not rare converting dead money to cash profits is where you basically just had it with the stock and you just want to close your entire position and use the C to enter a new position in the same month now the thing you need to know is that all exit strategies start the very same way you buy back the option once you buy back the option you no longer have an obligation you simply own the shares and then you're either free to sell a different option the same option sell the stock you have so much flexibility what you could do once you buy back your short options position so here's an example of where I

actually hit a double now I sold the option initially sto means sell to open at $410 where you see the Green Arrow once I did that early in the contract period the price of the stock started to decline now I bought back the option buy the close be TC at 85 uh in my material I have a guideline I call it the 20% 10% guideline that will help you decide when to buy back the option and at how much but I bought it back at 85 cents now I waited to see if the price of that stock bounced back up and sure enough it did so what happened here folks is I sold the exact same option in the same month at 310 so I ended up with a net credit of 225 310 minus 85 if I had four contracts that's $900 extra in cash in my account from being prepared with this exit strategy now I didn't catch that 310 at its peak but I got it pretty high here's that chart of that option you could see where I sold at 410 bought it back at 855 and then re sold it at 310 it actually hit as high as over $4 but I didn't get it at its peak I got it down here generating a beautiful $225 cash profit from using this exit strategy now let's move on to on or near

expiration Friday so let's say it's expiration Friday or the Wednesday or Thursday before that you sold the 50 call the price of the stock is 52 you know that if you take no action uh after 4 pm Eastern Standard Time expiration Friday your Shares are going to be sold but you don't want your shares to be sold let's say you could do one of two things you could roll out which means you buy back the strike and sell the next month same strike so had you sold the April 50 you buy it back and sell the May 50 that's called rolling out you could also roll out and up a more bullish position buy back the April 50 and sell the May 55 you have to make sure that the stock meets all the system criteria the most important one making sure that there's no earnings report coming out in the next month and that will avoid share assignment or the sale of your stock and again all exit strategies start with the same thing buying back the option so

here's a rolling out example I purchased I by the way I do more than one contract but I'm showing you this in one contract format so the math will be a lot simpler on October 23rd I purchased a 100 shares of AR MH at 3210 sold stto sld to open the 33 call out of the money call for 80 cents that generated an initial one-month profit of 2. 5% now as you could see on the upper right part of the screen circled in green on expiration for the price of the stock was 3431 or well above the 33 strike price so the share appreciation was from 30210 up to the strike I can't count it up to 3431 because I'm obligated to sell at 33 so I generated an additional $90 in share appreciation or an additional 2. 8% my total profit for that one month on this particular trade was 5. 3% now I had to make a decision am I going to buy back that option and sell the next month's option without even looking at an options chain to buy back that 33 call I know has at least a131 of intrinsic value in that premium because the 33 strike is in the money by a131 and there's always going to be a few pennies of Time Value so let's take a look at the options chain now for that 33 call and here we go to the ask column remember sell at the bid the lower buy at the ask the higher and we see a135 well that makes sense a131 of intrinsic value and four pennies in time value since its expiration Friday not much time value so that's what it's going to cost us to buy back the option now let's look at the next month's strike price and see how much we generate by selling the very same option the next month the 33 strike is selling for 210 okay so we get 210 that's our credit and we pay a135 that's our debit feed it into the calculator you see the 210 135 generating a profit of $75 on a cost basis of 3300 what this means folks is that we are guaranteed a 2. 27% one- Monon return as long as our shares do not depreciate by more than 3. 8% by expiration Friday if you like those numbers and they meet your goals then this is a trade that you're going to want to move forward with now I recommend that you keep some kind of a spreadsheet to keep track of your profits and losses and for those of you who are premium members we actually have a schedule D in the expanded version of the element calculator uh which can help keep track of it but here's an example of a spreadsheet from many several years ago on one of my smaller covered call Accounts I invested 93,000 and generated 3,031 of profit for a 3. 15% one month return now the interesting thing about this spreadsheet here is you'll see BTC loss by the close in other words I closed out my JD position looking to hit a double and lo and behold I did you see lower down so I bought back the shares at 9 $7 that's probably six contracts at 15 cents plus commission and I sold the bounce back at$ 480 so I generated an additional $380 profit by being prepared with that hitting a double exit strategy now uh many of you may have questions about strategies related to covered core writing uh perhaps you've even been asking Barry about it I haven't been watching your questions but I just want you to know that all this material is in my books and DVDs uh selling cash secured puts uh to enter a position at a discount it's a more of a bearish strategy some people like to use long-term options called leaps instead of buying the stock there are pros and cons to that strategy uh buying protective puts called the ca strategy to prevent against the catastrophic drop in price uh I have myself uh created a strategy for those of you interested in capturing dividends at a higher yield where you sell a long-term option to decrease your cost basis that's in my material as well and finally portfolio overwriting where you want to keep the so the stocks that you already own you don't want them uh sold and there are ways of doing that slightly different than the strategy that I've described to you in tonight's webinar so for those of you who want to master the Strate I'm going to be showing you a discounted package of my books and DVDs uh this is the what it looks like on the store on my website uh the three books I have are three top selling books on covered core writing my latest book the encyclopedia is actually uh number one selling book on amazon. com on cover cor writing it's a very humbling experience I might tell you um what we're offering tonight to all of those attending tonight's webinar is our most popular and comprehensive package and that's my new book with our new DVD program which comes with a companion workbook of all the stocks graphs slides and charts in the DVD program it also comes with one month's free premium membership that sells on my website for 419 what we're offering to you folks tonight is a $50 discount by putting in promo code cash flow below and you'll get a $50 discount off that package uh in addition to that we're going to ship you this for free and this offer is good through this Sunday April 28th the shipping will occur uh as the orders come through so those of you who order tonight the shipping will occur tomorrow and so on uh and you can enter the store by this link the bluecollar investor. com store you'll see this package and remember to put in the promo code cash flow to get your discount along with the free shipping now I promised you uh a free access to the Elman calculator and free files so here's where you get that you log on to the website the bluecollar investor. com I've circled uh in red it says free resources including the element calculator and that's the basic calculator I've also written the user guide for it you can also download that and print it out and you just have to put in your email address and you'll have access to the calculator plus all of the files the broker file and the band stock file that we talked about earlier in tonight's webinar I also might add that there's a glossery that I've written for covered core writing so for those of you who are going to use this strategy you may want to bookmark that every term uh that you might be interested in relating to covered core writing you'll find it in that glossery so uh that being said that kind of concludes uh tonight's webinar it looks like I did pretty good with the timing spent about an hour just a little over an hour I'm going to just ask uh Barry if he might uh unmute his microphone and let me know whether there are any unanswered questions that he didn't get to and maybe between the two of us we might spend a couple of more minutes answering any questions hi Alan um I've hit just about every one of them there's one that I was responding to for Leon and that question is what roll out means and what roll out and up means okay uh Leon uh rolling out means that what you do is you buy back the current month strike price let's say you had sold the $50 call you buy that back and then you sell the next month's $50 call that's rolling out now if you bought back the current month's $50 call and sold the next month's $55 call that's known as rolling out and up and that's a more bullish position to take because on the option side you're going to generate less cash but you're going to increase the value of your stock and you're going to oftentimes give yourself an opportunity for share appreciation the next month so depending on your market assessment depending on the chart technicals you could roll out to the same strike price or roll out and up a more bullish position to a higher strike price was that the only other one Barry yeah that was the one last one that uh was not addressed okay so then let me thank uh Tim again for inviting me uh to present this webinar and there's hold on there's Alan there's one more question from Melody just came in do you ever use the put option for downside protection uh yeah well uh using the collar strategy is a strategy that some of our more conservative investors use if it's a good strategy I have no problem with it uh I personally usually do not use it because I take so much time and care to get into stocks that are more likely to appreciate and value and then have my exit strategies at hand to mitigate losses that I don't want to take in less of a profit by paying for put options but it is not a bad strategy and it's actually a decent strategy for those that have a lower risk tolerance once again that's called the collar strategy buying protective puts so once again thank you everybody for attending this webinar I hope you found the information useful you can reach me at allenan the bluecollar investor. com you could reach Barry at barrythe bluecollar investor. com we answer all of our emails and Tim once again thanks so much for the invitation thank you Allan and thank you Barry thanks everybody for being here I appreciate it uh you'll get the link to the recording uh in your inbox by tomorrow morning when you wake up so we'll have that in about 12 hours so make sure you go to the bluecollar investor. com alen's got a great site he's got a great blog as well where you can keep up on all this stuff uh all the time when he's writing about some great investment ideas so thanks both to you all and thanks uh for attendees we'll see you at the next webinar the organized has ended the session