Increase Portfolio Yield with Covered Calls

Increase Portfolio Yield

with Covered Calls

http://www.borntosell.com

Mike Scanlin | [email protected] | (800) 434-6980

http://www.borntosell.com

Agenda

• Who is Mike Scanlin

• 5 minute review of Covered Call Strategy

• 15 minutes on Born To Sell

• Live demo of Born To Sell

• Q & A

5/6/2012Increase Portfolio Yield with Covered Calls at

www.borntosell.com2

Mike Scanlin Bio

• Trading covered calls since 1981 (31 years)

• Stock broker father taught me when I was 15

• My career

– 10 years software engineering (two IPOs, 1 acquisition)

– 4 years investment banking (raised $400M for 120 startups)

– 6 years venture capital (invested $86M into 10 startups)

– 3 years as CEO of Born To Sell


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• Option volume growing at 25% per year for 37 years

• 2010 volume more than 5x the 2002 volume

• At any moment, 300M open interest controls 30B shares

Options Popularity


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Average Daily Volume of Options 2002-2010

Resolution At Expiration

• For any given option series:

– 60% closed prior to expiration

– 10% exercised

– 30% expire out-of-the-money

• If you eliminate those closed prior to expiration, it‟s fair to say that

75% of those held to expiration expire worthless (good news for

sellers of options).


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Covered Calls Are Popular

• Covered calls are "so popular that 84% of investors who trade

options at Charles Schwab are using covered calls these days.” –

WSJ, Jan 2, 2010

• “Covered calls are the #1 most popular strategy among our retail

accounts” – online broker TradeKing

• Attitude of fans of the strategy: “If you’re not doing covered calls on

stocks and ETFs you own then you’re leaving money on the table

each month.”

• Works well in sideways, slightly down, or slightly up markets. Not

optimal in strong bull markets.


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What Is A Covered Call?

• Call Option

– 1 call option gives the buyer the right to buy 100 shares of stock at the

strike price before the expiration date.

– Conversely, the seller of a call option is obligated to sell 100 shares of

stock for the strike price if the buyer chooses.

• Covered call = long stock + short call option

– Buy 100 shares of stock (or ETF) and sell 1 call option against it.

• Free covered call tutorial at

– http://www.borntosell.com/covered-call-tutorial


www.borntosell.com7

http://www.borntosell.com/covered-call-tutorial







Risk/Reward of Covered Call

• Buy and Hold

– Buy 100 shares @ 46

– Break even = 46

– Unlimited upside


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46 5046

+ 700

0

lossloss

profit

• Covered Call– Buy 100 shares @ 46

– Sell a 50-strike call @ 3

– Break even = 43, max profit = 700

– At expiration, CC is better thanBuy & Hold for all values < 53

43 53

CC P&LB&H P&LB&H P&L

Pros and Cons

• Pros– Receive cash the day you sell the call options

– Creates additional yield on stocks and ETFs you already own

– Lowers your break even point

• More conservative than the Buy And Hold strategy

– Lowers account volatility

• First part of any drop in stock price is covered by call premium

• Cons– Puts a cap on your upside

– You can still lose if your stock drops below your net debit

• net debit = stock cost minus call premium received


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Covered Call Benchmarks

• Robotic call writing indices

– BXM writes 1 month at-the-money

covered calls on S&P500

– BXY writes 1 month 2% out-of-the-

money covered calls on S&P500

• Both have lower volatility (smaller

std deviation and lower beta)

• Both beat S&P in almost any time

frame


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23 year study

End 12/31/11

$100K Example



• Average holding period of 2 months

• Repeat the process 6x per year

• Less volatile stocks require longer option duration (maybe 3-6

months instead of 2) to make the premium worthwhile

Sym Shares Price Value Sell Upside Premium w/comm Annual Yield

COP 400 61.25 24500 Jan 62.5 @ 1.85 2.0% 740 730 13.8%

DOW 700 32.77 22939 Dec 34 @ 0.77 3.8% 539 529 19.1%

GLD 200 136.03 27206 Dec 138 @ 2.77 1.4% 554 544 16.6%

IWM 300 73.36 22008 Jan 76 @ 1.81 3.6% 543 533 11.2%

96653 2376 2336 15.5%

Data as of Nov 3, 2010

$500K Example



• Average holding period of 1.5 months

• Repeat 8x per year

Sym Shares Price Value Sell Upside Premium w/comm Annual Yield

COP 800 61.25 49000 Jan 65 @ 1.00 6.1% 800 790 7.4%

DOW 1500 32.77 49155 Dec 35 @ 0.47 6.8% 705 695 11.7%

GLD 400 136.03 54412 Nov 138 @ 1.37 1.4% 548 538 22.6%

IWM 600 73.36 44016 Dec 76 @ 1.17 3.6% 702 692 13.0%

AAPL 200 318.00 63600 Dec 340 @ 4.30 6.9% 860 850 11.1%

INTC 2300 20.97 48231 Dec 22 @ 0.22 4.9% 506 496 8.5%

KO 800 62.45 49960 Nov 62.5 @ 0.63 0.1% 504 494 22.6%

PEP 700 65.35 45745 Jan 67.5 @ 0.72 3.3% 504 494 5.0%

PFE 2800 17.38 48664 Dec 18 @ 0.22 3.6% 616 606 10.3%

SPY 400 122.26 48904 Dec 125 @ 1.46 2.2% 584 574 9.7%

501687 6329 6229 11.1%

Data as of Nov 3, 2010

Covered Call Web Site



• Born To Sell is a web site service that helps investors with the

covered call strategy:

– Screener sorts 230,000 covered call choices with custom filters

– Portfolio management & tracking for time premium optimization

• Not a trade recommendation service

• Not a broker (we don‟t handle client funds)

• Use-at-your-own-risk tools

• Offered as a subscription service (monthly, quarterly, annual)

• Free trial available

Two Ways To Use It



• Watchlist (top down, you already know the symbols you like)

– Enter symbols you‟re interested in tracking

– The covered call results are limited to only those symbols

– Can have candidate trades emailed to you after the close each day

• Search (bottoms up, you‟re looking for something new)

– Scans the universe of 230,000 covered calls that meet your criteria

(prices update during market hours, 15-min delayed)

– You can be as detailed (or not) as you want. Specify expiration month, how far

out-of-the-money you want (%), industry sector, P/E, etc.

– For example, you could say “Show me covered calls in the Basic Materials sector

that are 5% out-of-the-money, expire in 2 months, do not have any earnings

releases before option expiration, and have an annualized yield over 12%”

Watchlist



• Watchlist is only shows covered calls for symbols you enter

• This list can be emailed to you after the close each day

Earnings before expiration in red

Looking for 5-10% out of the money

Ex-div before expiration in green

Enter symbols you like

Looking at Mar expiration

Watchlist Email



Set the threshold to whatever you like (only alerted when there are matching returns available)

Covered Call Search



• Scans 230,000 call options (all symbols)

• Sort by any column. Add/remove additional columns.

• For more control, additional filtering choices under “Advanced Filters”

Still looking for 5-10% out of the money, but this time across the entire universe of stocks

Earnings before expiration are in red

Example Screen



• Filter 230,000 down to 38 candidates

Search Features



• Remove all candidates with earnings before expiration

(to remove earnings announcements risk)

• Limit results to only those with ex-div before expiration

(for dividend capture strategy)

• Limit results to only S&P 500, or only ETFs

• Include/exclude by industry sector (tech, healthcare, etc)

• There is an „excluded list‟ of symbols you don‟t like

• „Max Protection‟ page finds deep in-the-money candidates for

conservative buy-writes

Crowd Sourcing



Shows what other members have invested in

Shows what other members are watching

Click on any symbol to see the covered call chain

Covered Call Chain



Ex-div and earnings date before expiration reminders

Enter symbol

Select how much of the chain you want to see

Portfolio Management



• Dashboard shows you how much time premium remains in each

position (tiny premium remaining means it‟s time to roll)

• Rolling Calculator helps modify any existing position

(buy back the call and sell a different one)

• Personalized calendar shows ex-div and earnings dates for only

symbols in your portfolio

• Diversify feature points out if you are over or under weighted in any

sector (compared to the S&P 500)

Diversify



Underweighted in tech, use Search to find covered calls in tech sector.

Overweighted in financials, use Show Mine to see yours.

Offers

• Subscriptions



Plan Price Works out to

2 week trial Free Free

Monthly $59.95 $59.95/mon

Quarterly $149.95 $49.98/mon (17% off)

Annual $499.95 $41.66/mon (31% off)

• Free

• Covered call newsletter (monthly)

• Covered call blog (weekly)

• Covered call tutorial

Date post:	18-Jul-2015
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Increase Portfolio Yield with Covered Calls

Economy & Finance