How to use covered calls to increase yield (return) on your portfolio of stocks and ETFs. By selling call options on your existing positions you can add 6-10% per year to the dividends you already receive.
1. Increase Portfolio Yield
with Covered Calls
http://www.borntosell.com
Mike Scanlin | mike@borntosell.com | (800) 434-6980
2. Agenda
โข Who is Mike Scanlin
โข 5 minute review of Covered Call Strategy
โข 15 minutes on Born To Sell
โข Live demo of Born To Sell
โข Q&A
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3. Mike Scanlin Bio
โข Trading covered calls since 1981 (31 years)
โข Stock broker father taught me when I was 15
โข My career
โ 10 years software engineering (two IPOs, 1 acquisition)
โ 4 years investment banking (raised $400M for 120 startups)
โ 6 years venture capital (invested $86M into 10 startups)
โ 3 years as CEO of Born To Sell
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4. Options Popularity
โข Option volume growing at 25% per year for 37 years
โข 2010 volume more than 5x the 2002 volume
Average Daily Volume of Options 2002-2010
โข At any moment, 300M open interest controls 30B shares
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5. Resolution At Expiration
โข For any given option series:
โ 60% closed prior to expiration
โ 10% exercised
โ 30% expire out-of-the-money
โข If you eliminate those closed prior to expiration, itโs fair to say that
75% of those held to expiration expire worthless (good news for
sellers of options).
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6. Covered Calls Are Popular
โข Covered calls are "so popular that 84% of investors who trade
options at Charles Schwab are using covered calls these days.โ โ
WSJ, Jan 2, 2010
โข โCovered calls are the #1 most popular strategy among our retail
accountsโ โ online broker TradeKing
โข Attitude of fans of the strategy: โIf youโre not doing covered calls on
stocks and ETFs you own then youโre leaving money on the table
each month.โ
โข Works well in sideways, slightly down, or slightly up markets. Not
optimal in strong bull markets.
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7. What Is A Covered Call?
โข Call Option
โ 1 call option gives the buyer the right to buy 100 shares of stock at the
strike price before the expiration date.
โ Conversely, the seller of a call option is obligated to sell 100 shares of
stock for the strike price if the buyer chooses.
โข Covered call = long stock + short call option
โ Buy 100 shares of stock (or ETF) and sell 1 call option against it.
โข Free covered call tutorial at
โ http://www.borntosell.com/covered-call-tutorial
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8. Risk/Reward of Covered Call
โข Buy and Hold โข Covered Call
โ Buy 100 shares @ 46 โ Buy 100 shares @ 46
โ Break even = 46 โ Sell a 50-strike call @ 3
โ Break even = 43, max profit = 700
โ Unlimited upside
โ At expiration, CC is better than
Buy & Hold for all values < 53
+ 700
profit CC P&L
B&H P&L B&H P&L
0
46 43 46 50 53
loss loss
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9. Pros and Cons
โข Pros
โ Receive cash the day you sell the call options
โ Creates additional yield on stocks and ETFs you already own
โ Lowers your break even point
โข More conservative than the Buy And Hold strategy
โ Lowers account volatility
โข First part of any drop in stock price is covered by call premium
โข Cons
โ Puts a cap on your upside
โ You can still lose if your stock drops below your net debit
โข net debit = stock cost minus call premium received
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10. Covered Call Benchmarks
23 year study
โข Robotic call writing indices
โ BXM writes 1 month at-the-money
covered calls on S&P500
โ BXY writes 1 month 2% out-of-the-
money covered calls on S&P500
โข Both have lower volatility (smaller
std deviation and lower beta) End 12/31/11
โข Both beat S&P in almost any time
frame
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11. $100K Example
Data as of Nov 3, 2010
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%
โข Average holding period of 2 months
โข Repeat the process 6x per year
โข Less volatile stocks require longer option duration (maybe 3-6
months instead of 2) to make the premium worthwhile
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12. $500K Example
Data as of Nov 3, 2010
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%
โข Average holding period of 1.5 months
โข Repeat 8x per year
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13. Covered Call Web Site
โข Born To Sell is a web site service that helps investors with the
covered call strategy:
โ Screener sorts 230,000 covered call choices with custom filters
โ Portfolio management & tracking for time premium optimization
โข Not a trade recommendation service
โข Not a broker (we donโt handle client funds)
โข Use-at-your-own-risk tools
โข Offered as a subscription service (monthly, quarterly, annual)
โข Free trial available
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14. Two Ways To Use It
โข Watchlist (top down, you already know the symbols you like)
โ Enter symbols youโre interested in tracking
โ The covered call results are limited to only those symbols
โ Can have candidate trades emailed to you after the close each day
โข Search (bottoms up, youโre looking for something new)
โ Scans the universe of 230,000 covered calls that meet your criteria
(prices update during market hours, 15-min delayed)
โ 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.
โ For example, you could say โShow 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%โ
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15. Watchlist Enter symbols
you like
Looking at Mar
expiration
Looking for 5-10%
out of the money
Earnings before
expiration in red
Ex-div before
expiration in green
โข Watchlist is only shows covered calls for symbols you enter
โข This list can be emailed to you after the close each day
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16. Watchlist Email
Set the threshold to whatever you
like (only alerted when there are
matching returns available)
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17. Still looking for 5-10% out of the
Covered Call Search money, but this time across the
entire universe of stocks
Earnings before
expiration are in red
โข Scans 230,000 call options (all symbols)
โข Sort by any column. Add/remove additional columns.
โข For more control, additional filtering choices under โAdvanced Filtersโ
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18. Example Screen
โข Filter 230,000 down to 38 candidates
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19. Search Features
โข Remove all candidates with earnings before expiration
(to remove earnings announcements risk)
โข Limit results to only those with ex-div before expiration
(for dividend capture strategy)
โข Limit results to only S&P 500, or only ETFs
โข Include/exclude by industry sector (tech, healthcare, etc)
โข There is an โexcluded listโ of symbols you donโt like
โข โMax Protectionโ page finds deep in-the-money candidates for
conservative buy-writes
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20. Shows what other
Crowd Sourcing members have
invested in
Shows what other
members are watching
Click on any symbol
to see the covered
call chain
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21. Covered Call Chain Select how much of the
chain you want to see
Enter symbol
Ex-div and earnings date
before expiration reminders
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22. Portfolio Management
โข Dashboard shows you how much time premium remains in each
position (tiny premium remaining means itโs time to roll)
โข Rolling Calculator helps modify any existing position
(buy back the call and sell a different one)
โข Personalized calendar shows ex-div and earnings dates for only
symbols in your portfolio
โข Diversify feature points out if you are over or under weighted in any
sector (compared to the S&P 500)
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23. Diversify
Overweighted in
financials, use Show
Mine to see yours.
Underweighted in
tech, use Search to
find covered calls in
tech sector.
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24. Offers
โข Free
โข Covered call newsletter (monthly)
โข Covered call blog (weekly)
โข Covered call tutorial
โข 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)
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