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Tutorial: How SMAC can help find the Ideal Covered Call Strike
Updated
Q3 Earning season is approaching fast
Background: The earnings covered call volatility play
------------------------------------------------------------------
one of the easy earning plays if you hold a portfolio of stocks (or if you're a fan of the wheeling strategy) is to sell Covered Call (CC) right before the earnings announcement - when the volatility is inflated and the premium price peaks - usually using weekly options - which then you can close immediately after the earnings have been announced, or just leave them to expire worthless if they end up out of the money (OTM).
When this play is done right, and depending on your position size, it can deliver few hundred (if not thousand) bucks literally overnight. When we design this play, we need to consider also the scenario that with the earnings announcement, the stock price may shoot over our selected strike, and we may end up getting assigned - and the stock is called away from us.
However, with the proper "design" of this trade play, you can set it up for a "no-lose" trade scenario
- if you don't get assigned, you keep all the call premium (not bad for a 2-day trade) - see example below - you still keep the stock.
- if you get assigned, you will earn the difference between the strike price and your breakeven *plus* the covered call premium -- so a winning trade in both scenarios.
if we can repeat this play for few stocks during earnings, the gain can accumulate and bring in a very "good month" for the trader who can master this play.
Using the SMAC to make this scenario easier
-----------------------------------------------------
One of the reasons i wrote the "Auto-stepping, Zero-lag Moving Average Channel - SMAC" script is to help me with trade scenarios like this. Let me share how.
- Assume i hold 1,000 AAPL shares in my portfolio.
- i just bought them couple of weeks ago - and i am planning to play the volatility and sell Covered Call into the upcoming earnings using the weekly options.
- my goal is either to collect the call premium and keep holding AAPL past the earnings - or to get assigned and sell the stock and realize a profit larger than what i would have got if i just bought then sold the stock direct
- my preferred strike "distance" is 5% Out of the Money (OTM) - which can give a reasonable value of premium while giving me room to still keep the stock if the price doesn't shoot that high due to the earnings.
- I plot my breakeven price on the chart - say for the example here, it's $143
- Add the SMAC to the chart and set the SMAC Percent Envelop to 5%
- This will immediately show what price range i should pick the Covered Call strike if i want a 5% OTM -- it's the $151 or the $152. Maybe i would pick the $152, cause if i get assigned, it would give me a larger gain on the underlying position.
Calculating the P&L for both CC scenarios is also easy now on the chart
---------------------------------------------------------------------------------------
- Not Assigned: after the earnings, the stock still closes below our strike - we can even leave the call to expire worthless - no commission paid - i keep the premium
assume the CC premium is $1.3 by the time i sell the CC & assume i have 1,000 AAPL shares, that's $1,300 over-night! = 1% return and i still keep the stock
- We get assigned
with the same assumptions above, we keep $152 - $143 = $9 + the premium ( = $10 bucks per share -- that's $10,000 in 2 weeks. around 7% return) - we can buy AAPL again later on a dip.
*** Big Note here
---------------------
Another scenario is, if my breakeven for AAPL is above the 5% strike price level, in which case, i would not consider this trade at all - because if i sell the CC and i get assigned, i would basically close my position at a loss - again, once i set the SMAC and my BE of the chart, i can easily see if that's the case and make a fast trade decision - here's how this would look on the chart
if you hold 1 or 2 positions in your portfolio - this whole SMAC / Chart thing may not be worth it - maybe a quick mental calculation or simple spreadsheet is easier :) - but if you hold 15-20 positions in your portfolio / multiple accounts, doing this fast during the earnings days and visually on a chart can save a good amount of time and give more confidence.
i hope this can inspire some fellow traders to share how else they can use the Auto-stepping zero-lag Moving Average Channel
Please do not treat this post as a trade recommendation - or as trading education - i'm just sharing thoughts and some of my limited experience - Please trade safely.
Background: The earnings covered call volatility play
------------------------------------------------------------------
one of the easy earning plays if you hold a portfolio of stocks (or if you're a fan of the wheeling strategy) is to sell Covered Call (CC) right before the earnings announcement - when the volatility is inflated and the premium price peaks - usually using weekly options - which then you can close immediately after the earnings have been announced, or just leave them to expire worthless if they end up out of the money (OTM).
When this play is done right, and depending on your position size, it can deliver few hundred (if not thousand) bucks literally overnight. When we design this play, we need to consider also the scenario that with the earnings announcement, the stock price may shoot over our selected strike, and we may end up getting assigned - and the stock is called away from us.
However, with the proper "design" of this trade play, you can set it up for a "no-lose" trade scenario
- if you don't get assigned, you keep all the call premium (not bad for a 2-day trade) - see example below - you still keep the stock.
- if you get assigned, you will earn the difference between the strike price and your breakeven *plus* the covered call premium -- so a winning trade in both scenarios.
if we can repeat this play for few stocks during earnings, the gain can accumulate and bring in a very "good month" for the trader who can master this play.
Using the SMAC to make this scenario easier
-----------------------------------------------------
One of the reasons i wrote the "Auto-stepping, Zero-lag Moving Average Channel - SMAC" script is to help me with trade scenarios like this. Let me share how.
- Assume i hold 1,000 AAPL shares in my portfolio.
- i just bought them couple of weeks ago - and i am planning to play the volatility and sell Covered Call into the upcoming earnings using the weekly options.
- my goal is either to collect the call premium and keep holding AAPL past the earnings - or to get assigned and sell the stock and realize a profit larger than what i would have got if i just bought then sold the stock direct
- my preferred strike "distance" is 5% Out of the Money (OTM) - which can give a reasonable value of premium while giving me room to still keep the stock if the price doesn't shoot that high due to the earnings.
- I plot my breakeven price on the chart - say for the example here, it's $143
- Add the SMAC to the chart and set the SMAC Percent Envelop to 5%
- This will immediately show what price range i should pick the Covered Call strike if i want a 5% OTM -- it's the $151 or the $152. Maybe i would pick the $152, cause if i get assigned, it would give me a larger gain on the underlying position.
Calculating the P&L for both CC scenarios is also easy now on the chart
---------------------------------------------------------------------------------------
- Not Assigned: after the earnings, the stock still closes below our strike - we can even leave the call to expire worthless - no commission paid - i keep the premium
assume the CC premium is $1.3 by the time i sell the CC & assume i have 1,000 AAPL shares, that's $1,300 over-night! = 1% return and i still keep the stock
- We get assigned
with the same assumptions above, we keep $152 - $143 = $9 + the premium ( = $10 bucks per share -- that's $10,000 in 2 weeks. around 7% return) - we can buy AAPL again later on a dip.
*** Big Note here
---------------------
Another scenario is, if my breakeven for AAPL is above the 5% strike price level, in which case, i would not consider this trade at all - because if i sell the CC and i get assigned, i would basically close my position at a loss - again, once i set the SMAC and my BE of the chart, i can easily see if that's the case and make a fast trade decision - here's how this would look on the chart
if you hold 1 or 2 positions in your portfolio - this whole SMAC / Chart thing may not be worth it - maybe a quick mental calculation or simple spreadsheet is easier :) - but if you hold 15-20 positions in your portfolio / multiple accounts, doing this fast during the earnings days and visually on a chart can save a good amount of time and give more confidence.
i hope this can inspire some fellow traders to share how else they can use the Auto-stepping zero-lag Moving Average Channel
Please do not treat this post as a trade recommendation - or as trading education - i'm just sharing thoughts and some of my limited experience - Please trade safely.
Note
Apologies for the (too fast) calculation -- using the same premium $1.3 for both scenarios above .. correction below."- We get assigned
with the same assumptions above, we keep $152 - $143 = $9 + the premium ( $9 + $1.3 = $10.3 bucks per share -- that's $10,300 in 2 weeks. around 7% return) - we can buy AAPL again later on a dip."
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