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Posted by Martin December 21, 2020
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Market gapped down on Covid fear, new trades, and adjustments for 12/21/2020

The stock market gapped down more than 2% on renewed fear of the new strain of Covid. That is, what the media are telling us. I don’t think this is the reason for selling. The market was quite over-extended and some sort of a pullback was needed. That is what has happened this morning. Since the opening, the market has rallied up erasing almost all losses so far. Will it continue tomorrow? Not sure. We have to wait and see.

On one hand, I welcome this pullback as I still have a trade against IWM (a covered call) which has run away from me so much that I am not able to roll it for credit and I am already too far away in time. I decided to wait and attempt to roll after some time is gone.

But I had a few trades that needed adjustments.

The trade, that needed an adjustment was a strangle against TSN (Tyson Foods):

cherries Roll 1 TSN Jan 15 (monthly) 65p/72.5c strangle to Jan 29 64p/68c for 0.50 credit

Our 65 put in TSN strangle got in the money as the stock continued dropping. We decided to roll the strangle lower to keep the price of the stock between the two legs. I was not able to roll everything as one trade (the options were mispriced and I couldn’t find a good price that would execute), so first, I closed the call side for 0.21 debit, then rolled the call side lower for 0.20 debit, and then I added a call side for 0.91 credit. Overall, this adjustment lowered our put side down and we collected additional 0.50 credit.


Last week, we got assigned 100 shares on our PPL strangle when our put side ended in the money. We bought 100 shares of PPL at $27 a share. Today, we sold a covered call:

fish STO 1 PPL Jan 15 (monthly) 27 covered call for 0.47 credit

Last week our puts ended in the money and we were assigned to 100 shares of PPL at 27 a share. In this account (fish ) we now hold 124 shares of PPL. We now will be selling covered calls against this position until we get assigned and sell the shares (the wheel strategy).


We used the collected credit to buy shares of stocks we like to accumulate. We bought one share of the ICSH fund and one share of AT&T stock:

fish BTO 1 T shares @ 29.06 debit
fish BTO 1 ISCH shares @ 50.51 debit

We generated income selling covered calls in this account and we reinvested this income and bought 1 share of AT&T and 1 share of the ICSH fund. The ICSH fund serves as a savings account to us. It holds value relatively well during selloffs and it pays a nice dividend (currently the dividend yield is 1.60%).

T and ICSH

We also opened new trades replacing expired trades from the last week:

cherries STO 1 SNOW Dec 24 Iron Condor 295/300/365/370 for 0.70 credit
cherries BTO 1 ICSH shares @ 50.51 debit
cherries BTO 1 T shares @ 29.00 debit

This morning we sold another Iron Condor against SNOW stock and collected $70 credit. We reinvested the credit and bought 1 stock of ISCH (our capital reserves ETF) and one share of AT&T (T) which we are accumulating to reach 100 shares.

Since the markets are selling off (finally) we will be waiting before we open more trades for the panic to settle down. This selling may just be a dip to buy.

SNOW @ $333.92


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Posted by Martin December 19, 2020
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Selling Covered Calls below your stock cost basis. What to do?

The covered calls strategy is considered the safest strategy good for beginners and almost all brokers will allow you to trade this strategy in their basic options trading tier level. Yet, that doesn’t mean that this strategy is riskless and has no potential to give you a hard time trading it. It can become a nightmare and guarantee losses if you do not know what to do when this situation happens.

I trade covered calls in my accounts and I spent a lot of time thinking about how I could protect those trades when they get into trouble. And there are several strategies you may deploy to save your trade and make it a winner. The hardest part is when to pick the right one.

A typical strategy of selling covered calls is that an investor already owns 100 shares of a stock and she decides to start selling covered calls to generate additional income. I love doing it and it is my goal in my portfolio. I accumulate shares of a stock of my interest until I reach 100 shares. Once I reach 100 shares, I start selling covered calls and collect premiums on top of my dividend income. This is called portfolio overwriting.

The second most common covered call strategy is a buy-write strategy. An investor buys 100 shares of a stock and immediately sells covered calls. It is all done in one trade. Usually, this investor is not interested in holding the stock for a long period of time in his portfolio. He hopes, that he would sell his position when the call expires in the money and his shares are called away. Some investors use this strategy to create a triple income strategy. They position their trade so on top of the covered call premium they also capture a dividend. Then, their stock is called away.

No matter what you do, there is a risk involved. The risk, however, is not on the option. The option strategy is still a very safe one. The risk is with the stock.

What can happen is that an investor buys a stock, for example, for $40 dollars a share and sells a covered call with a $45 strike price. All looks great, until the stock tanks to $20 a share. The $45 strike covered call will expire worthless but the investor can no longer sell a new $45 strike because at this strike there is no premium anymore. She can sell a $25 strike covered call, but the problem is that she bought the stock at $40 and if the stock recovers and her new $25 covered call is assigned, her shares will be called away at $25 a share. This will cause a $15 a share loss (or $1500 in total dollar amount). So, what can you do to prevent this?

In this article, I will try to describe all strategies I apply myself when this happens. As I mentioned before, the hardest part is to choose the right one at the right moment.

I will list all the ideas in no particular order below and try to explain what each trade can do to your position but also what risks such adjustment can carry. Let’s begin.


 · Do nothing!


Sometimes, the best action to do is no action whatsoever. Usually, when you wake up one day, open your computer, log in to your brokerage account and find out that your stock position gapped down significantly, the best approach may be to just sit and wait. Let your original covered call expire and wait. I sometimes do this to assess my next move and see what a stock may or may not do next. Jumping the gun may not be the best approach. In today’s market, we saw fast selloffs and fast recoveries. In 2020 the March selloff was the shortest in the entire market history. The only second-fastest sell-off happened in 1987. The recovery also took a very short time. Many of my stocks in my portfolio, which were impacted by this selloff and I got assigned, already recovered and today trade higher than before the Covid selling. This may not be always the case, but in this situation waiting and sitting on my hands paid off.


 · Sell cash-secured puts instead of the calls


When your stock drops deep below your cost basis, it is sometimes better to sell a cash-secured put rather than trying to sell another covered call below your cost basis. This idea is OK if you have enough cash to cover this trade because you will be taking another obligation of buying 100 shares if the stock keeps falling. But in this case, I always managed to roll the puts down and away. At some point, the stock started recovering, and after it got back to the new cost basis, I switched to selling covered calls again. When collecting premiums, keep track of the received premiums and your actual adjusted cost basis.


 · Roll the covered call deep in the money


This strategy is good when you happen to catch the knife and start seeing your stock falling off the cliff. Let’s say, you were bullish on your stock, you bought 100 shares at $40 a share and sold a covered call at $45 strike price. Soon after, the situation in the market changes, or the company fundamentals are no longer bullish and you become bearish. The stock starts selling off and the selling is rather harsh. In this case, immediately roll your $45 strike price call deep in the money. For example, the stock starts falling from $40 a share to $35 a share, you buy back your 45 strike call and sell new deep in the money $20 strike call. If there is still enough time in the original contract, you can keep the same expiration date, if the contract has 10 days or less to expiration, roll it also away in time.

What does this do to your position?

By rolling deep in the money, you collect a premium but also an intrinsic value of the option. And that intrinsic value provides you with further downside protection. In our example, if the stock is at $35 a share and you roll to a $20 strike, you will collect, for example, a $15.95 premium. The 0.95 is the new extrinsic value, the premium you can keep, the $15.00 is an intrinsic value providing your stock a cushion that it can fall all the way down to $20 a share and you will not lose that money. Your stock will be losing $2,000 but you have received $1,500 + premiums. You effectively mitigated a large loss. With this strategy, however, be prepared that your stock will be called away. This is the last adjustment you could do. Once you do it, you won’t be able to repair it as rolling deep in the money options is not possible. At least, not for credit.


 · Swap the cost basis


This idea is a bit complex in the way how you look at a trade. Many times I look at a trade as a part of a more complex strategy, so selling and buying in and out of a position is not an isolated trade to me but a series of steps of one big trade.

What I do in this case is that I start selling covered calls below the stock cost basis and if the stock starts recovering I try to roll the calls higher and away in time. I do it for credit only. But when it is no longer possible to roll that call, I let it assign, and immediately sell new in the money put. For example, I got a stock assigned to me at $40 a share. I kept selling covered calls all the way down to $15 a share (my lowest premium was $17.50 at some point). I could roll the covered call up and down from 17.50 to 25 and back down to 20 as the stock kept bouncing around. At some point, I got stuck at 20 strike price and the stock rallied to 24 a share. I was not able to roll my 20 strike price call, so I decided to let is assign. Immediately, I sold 25 strike in the money put and let that put assign. My new cost basis dropped from $40 a share to $28 a share (with all the collected premiums, dividends, and the swap). Now I could start selling $30 strike price calls. Instead of selling cash-secured puts, you can buy the stock back immediately after it is called away to re-establish the position.

Note that this idea may not always be feasible to do. Usually, you do not want to do this strategy when the difference (spread) between the call assignment and in the money put is too large. For example, you get assigned at $20 a share but you would have to be selling puts (or buying shares back) at $38 a share. That gap is too large and the loss would be too big to be offset by this swap. So, before you do it, review the math first. Another implication of why this idea may not be always feasible is tax implications. This swap will most likely be considered a wash sale and you will not be able to use the loss for a tax deduction.


 · Sell covered strangles


If it happens to you and you sell a covered call that is already below your cost basis and on top of that also deep in the money because in the meantime the stock recovered sharply and left your calls way behind, strangles are the best strategy to get out of the hole. To create a strangle, you sell an OTM put adding it to your existing covered call. You then use a premium from the put to roll the call higher. This strategy can help you with rolling deep in the money calls which would be a lost trade otherwise. For example, you have a stock trading at $30 a share, your original cost basis was $40 a share and your covered call is at $25 a share (in the money) and unable to roll it higher. You sell a new cash-secured put with a $25 strike (out of the money) and collect a 0.45 premium. That premium will allow you to roll your $25 covered call up to the $26 strike price. As the expiration nears, you roll both legs (put and call) away in time and higher, for example, you can close a December 2020 position and open a new January position while rolling puts from 25 strike to 28 strike and call from 26 strike to 30 strike. You keep doing this as long as your calls get out of the money. I had a position against SIG stock which dropped from $25 a share all the way down to $10 a share. I converted my covered call to a strangle and kept rolling higher. I was able to keep my put strike at the same strike ($13 a share) all the time while rolling my calls higher and still collect nice premiums. Again, if you decide to deploy this strategy, make sure you have enough cash in your account because adding puts means that you are accepting another obligation to buy 100 shares of the stock if the puts get in the money. However, strangles are extremely easy to roll up or down as needed, and should the stock drop down again you can roll the entire strangle down too, this time, you will collect a premium on your covered call which will help you offset the put cost. Just make sure, the entire trade is always a credit trade.


 · Always protect your trade against early assignment


When it happens and you end up having your calls deep in the money (or puts if selling strangles), you want to protect yourself against early assignments. It is not a 100% bulletproof strategy but it works most of the time. I always roll the trade 90 days to expiration and keep adjusting every time it gets to 45 – 60 days to expiration. To illustrate it better: for example, I have 10 days to expiration (DTE) covered call, the stock recovers fast and the call gets in the money. I roll it from 10 DTE to 90 DTE and higher strike. When the trade gets down to 45 – 60 DTE, I roll it again to 90 DTE and so on. This means the expiration is so far away that it is highly unlikely that anyone would assign this early. It still may happen, but the chance of it happening is low.


 · Hedge your call with new stock position


If the stock is recovering and you can’t roll your covered call higher (for example, you have a stock that doesn’t offer too many strikes and/or premiums) then you can hedge the call by buying another 100 shares. For example, you had 100 shares of a stock with a $40 cost basis, you ended up with a $20 strike price covered call and the stock is trading for $28 a share. There are no more strikes or premiums available to allow you to roll the call strike higher and away in time. Buy 100 shares of the stock at $28 a share and let those assign.


 · Just close it


If none of the ideas above are appealing to you and all if it seems like too much work and too much hassle, then the best approach would be just to close the covered call position by buying it back. You can set a stop loss (most brokers allow you to set a stop loss on a single call or put option) and let the stop loss kick you out of the trade. You can use this strategy when you want to retain the stock position. You can use this strategy to close your covered call trade after it reaches 90% of your premium, for example, you sell a call with 30 DTE for 1.00 premium, ten days later, the call is worth 0.10 only. There is no reason for waiting another 20 days to capture $10, so close the trade and move on. You do the same with loss protection, set the stop loss to close the trade when the premium is 2x received credit. For example, you collected a 1.00 premium, you close the trade when the option trades at 3.00.


 · Roll it for debit, but…


Sometimes, when the stock and the covered call is not deep in the money and not too deep below your cost basis, it makes sense to roll an in the money covered call for debit. A covered call is a ceiling (cap) to your profits, rolling this ceiling or cap higher gives you more profit potential on the stock. Thus giving up some premium still makes sense. For example, you have a stock that trades at $200 a share. You sold a $210 strike covered call. The stock jumped up to $280 a share. You check the options chain and see that you can roll your covered call from 210 to 250 for 0.30 debit. There is no doubt here, just do it. You will pay $30 dollars to roll but you gain $4000 on the stock profit. You raised your capped profit from $210 a share to $250 a share. And if the stock doesn’t drop in the next few days, you can repeat the process and raise the ceiling higher again. As long as the stock potential profit is larger than the debit you paid, it still makes sense of doing it.

These are all my ideas I apply to my options trading. I do not mind rolling options away in time, higher or lower, adopt additional strategies to help me to dig the option in trouble out of the hole. There is no limit to your thinking. As long, as the trades result in more credit and more income, I do it.
Options are a great tool and you can be playful when using them. Just make sure, your options are protected in some way – either by holding enough cash or have enough shares to cover the trades. Then, you can use whatever you want and options will be safe and rewarding.

Do you know about any other idea about how to trade covered calls when they get in trouble? If so, please, leave a comment below.

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Posted by Martin December 13, 2020
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Would you worry about valuation getting stocks for free? Yes, or no?

What if you could obtain shares of a stock you want to have in your portfolio for free? Would you worry about the valuation of that stock?

For example, when looking at the valuation of Apple (AAPL) the stock is permanently, grossly overvalued since 2019:


And what about Coca Cola? A great stock I want to own. I always wanted to own the famous KO. But, look again at its valuation:


Coke had a favorable valuation only in the 2008 crisis. Before, and after, it was always traded at a premium, always overvalued. If you decide to buy stocks when they are undervalued then you would never buy stocks like KO, or AAPL. You will be waiting for a better valuation of these stocks, you probably never buy. Or, you decide to give up and buy shares no matter what their valuation is.

But, what if you could buy those shares and it cost you nothing?

Trading options could help you buy shares for free. I sell puts and collect premiums. I take those premiums and reinvest in stocks I like. For example, last week, I sold an Iron Condor against SNOW… and I sold a strangle against MO:


Both trades expired worthless and I kept the premium. I used that premium and bought shares of AT&T (T) and ICSH stocks. I bought them for free. I used money the “house” paid me. Should I be worried about valuation?

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Posted by Martin October 28, 2020
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Stock market plunges on virus fear

Stocks opened lower as expected and crashed -2.40% on virus fear. This makes the market correcting another 7.5% within the original 10.6% correction. Kind of a correction inside a correction since we haven’t fully recovered from the first one.

This also breaks all previous patterns (unless we recover by the end of the day) and makes the double top pattern more likely.


S&P 500 failed cup and handle

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Posted by Martin October 27, 2020
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A storm is coming

On Thursday, big names are reporting earnings… AMZN, AAPL, GOOG, GOOGL, and FB… and these companies can shake the market for sure. I think the best one can do is to stay away for now until we see what is going to happen.

S&P 500 failed cup and handle

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Posted by Martin October 27, 2020
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Selling in Wall Street is set to continue tomorrow. On Monday we saw the indexes declined (SPY ended the session down 0.33%) and the negative sentiment seem to continue. The futures pre-market data indicate the DJI to drop even more. As of now the opening will be down more than 300 points or -1.14%.

Of course, a lot may change before the cash trading starts on Tuesday morning, however, we seem to gap down and accelerate.

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Posted by Martin October 27, 2020
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Cup and handle failed, what now?

The stock market was forming a cup and handle formation, but yesterday, this pattern failed.

If we were to continue the pattern, we were supposed to continue higher as indicated in the picture below:

S&P 500 failed cup and handle

Since this pattern failed, what is ahead of us now?

We can see or identify two other possible patterns:

1) A double top formed and we may see the price to go down to 200 DMA

The double tops are rare and do not occur very often (no matter how much others on Facebook tell you otherwise). And even if they do occur, experienced chartists say that they are not very reliable patterns. Why? One reason is that it is very typical for the price to get some harsh time at the top resistance and it may take a few attempts for the market to break that resistance. Thus the price stalls once or twice, sometimes three or four times before it breaks up. Short term, you may identify it as an intermediate movement stop with a small pullback but definitely not a major trend reversal. You may look at the double top as a consolidation pattern rather than a major reversal one. Most of the time. Sometimes, it will not work as consolidation, and the price crashes. If this is the case today, we may see some violent downturn down to the 200-day moving average:

S&P 500 double top

Given the election is in a week, after that, we may expect stimulus to pass, the market may recover from this pre-election weakness and continue higher. If that is the case (and I think it is), then the second emerging possible patter is the one in play:

2) An upward sloping triangle

S&P 500 double top

This pattern seems more probable but we will have to wait for the resolution. If this is really in play, we are not out of the woods yet, the market may continue in a zig-zag move for sometime before we find out whether we break up, or down.

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Posted by Martin October 24, 2020



If you are familiar with this strategy, you can pretty much skip this post as you already know all the ropes. If you are a novice investor, this strategy may help you maximize your returns.

This strategy utilizes trading stocks and options. I use this strategy myself and it generates consistent returns.

Stock pick criteria

To trade this strategy I pick a stock that is relatively lazy (so doesn’t have too much volatility in it), trades mostly sideways or slightly up, pays dividends consistently (dividend aristocrat), and I must be willing to buy 100 shares of this stock (that means, I have to have enough money in my account to do so). The best candidates are usually utility stocks but any stock with lazy charts will do it. I also check options on that stock to make sure it has enough premiums trade.

Trading the strategy

Once you have a stock that meets your criteria, start doing the following:

1) Sell a put contract with delta 20 – 30 (that will determine your strike price), a premium of 0.30 ($30) or more, and 45 days to expiration or shorter if you can get the same premium.

2) Reinvest the premium and buy one share of the stock you traded (if the premium is less than the stock price, leave it in cash).

3) If the stock stays above the strike price at expiration, it will expire worthless, you keep the premium, and go back to step #1 above.

4) You may apply a 90% rule which means that you buy back the option once you achieved a 90% premium, e.g., you sold the option for 1.00 ($100) and buy it back for 0.10 ($10). This means you skip step #3 above.

5) If the stock stays below the strike price at expiration, you may attempt to roll it into the next expiration day and the same strike, or into the next expiration day and higher, as long as the roll is a credit roll. If this is not possible, let the option assign and buy 100 shares of the stock.

6) Once you have the stock, sell a covered call option. Make sure your strike is above your cost basis. For example, if you were assigned at $30 a share, make sure you sell the call with a strike price of 30 or more. Note, there will be situations when the stock drops so low that this will not be possible, but there are strategies to go around this. If interested, I can write about it in another post.

7) Reinvest the premium from covered call trade and buy another share of the stock. Also, in this period, you will start collecting dividends. Reinvest the dividends to buy more shares.

8) If the stock stays below your call strike price at expiration, the call will expire worthless and you can go back to step 6 above.

9) You can also buy the call back once you reach 90% profit on the call and sell a new call with the next expiration day, (i.e., skip step 8 above).

10) If the stock ends above your short call at expiration, you can roll the option into the next expiration and same strike, or the next expiration and higher strike as long as it will result in a credit trade.

11) If the roll as described in the step above is not possible, let the call assign, and sell your shares. If done as described above, you will make a profit on the calls and on the stock. Once you have no shares, you can go back to step #1 above.

That’s it. If done correctly, this strategy is almost invincible and you will be making nice profits. If you need more help, let me know.

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Posted by Martin October 19, 2020
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Vaccine and stimulus

Stimulus hopes before the election fade away and investors are dumping stocks (but wait, they will be buying it back like crazy when the hopes renew after the election)…

A good start on vaccine hopes diminished on the stimulus failed hopes. But who knows what the hopes are. It is all that media make always up to come up with to justify the market price action.

My view is that every storm on Wall Street is a storm in a spoon of water inflated by media and panicking investors who are extremely short term oriented. And many lose money because of it which boosts their “I told you so” posture when talking about the markets.

Ignore it, execute your plan and you will perform better. A lot better!

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Posted by Martin October 18, 2020


October 16, 2020 expiration

We had a few options positions expiring last week on Friday, October 16:

PPL – Oct 16 (monthly) 29.00 call for +0.35 – WINNER
STOR – Oct 16 (monthly) 25 put for +0.68 – WINNER

All other trades were rolled into November expiration day.
You can check our open positions on our Trades & Income page.

Last week was successful in spite of the market decline which I have expected anyway. It allowed us to roll a few trades into a better strike, for example, our IWM trade which went up so much that we weren’t able to roll it higher fast enough.

We generated $167 dollars in options premiums last week and $98 dollars in dividends. All income was reinvested into new stock positions according to our plan.

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