By: Tom Gentile
on October 4th, 2023
Originally published via our newsletter previously. Subscribe for early access!
September lived up to its expectations of being a bearish month in the financial markets.
Should seasonality remain consistent to at least its past 10-years history, investors and options traders should find October a successful month, at least for market bulls.
Every day for the month of October shows a majority of bullish patterns.
Market in Focus
Tools and Observations
Using Seasonal Patterns when Writing Covered Calls is a strategy that allows one to put stock that they ownup for sale at a specific price, with an expiration date that if it doesn’t get bought or ‘Called away’ by that date allows the seller to keep the premium sold.
Another prospective outcome in writing covered calls is on gets the stock called away or they sell it at the strike price it was put up for sale and they still keep the premium of the call option they sold and may realize a capital gain in the stock, depending on what their cist basis in the stock is.
Here’s an example on how it works.
One owns a stock. To write a covered call also known as selling a call option against the stock that they own, one has to own 100 shares or 100 share increments.
1 option contract is equivalent to 100 shares so one cannot sell an option if they only 73 shares. If they own 173 shares they can only write or sell 1contract (leaving the 73 shares in their account to do with as they wish).
One can then sell to open 1 contract of a call option with an expiration they want and collect the premium times 100 shares for doing so.
That money is not immediately available for one to spend as they have to or are obligated to deliver the stock at the strike price sold anytime up to and including that options expiration date.
One expiration comes and goes, if it was not called away, one keeps the money for selling the call and can now do what they want with the money.
When to write the call? What strike price call does one write or sell? These are two very good questions, and the use of my scanning tool Money Calendar can help answer those.
Let’s run through a scenario where one owns 100 shares of Raymond James Financial (NYSE: RJF).
One can look at RJF and consider the price it is at on the chart as a support price 100.
One can opt to write or sell to open an October 20, 2023, $100 Call.
Right now, it is priced at $2.70 or $270 per contract.
If one sold that option to open they would generate $270 into the account until expiration of that option, or it was closed prior to that date.
That would be a rate of return of 2.7% if they had bought 100 shares at $100.
The rate of return would be 2.7% for roughly 23-days (expiration day) if they had to hold on to the stock until this options expiration.
If it gets called out they break even on the stock, (bought stock at 100, sold itat 100) and they keep the 2.7%.
The stock is now ‘freed up’, meaning they own the stock and there is no call option sold against it. They can look out to next month and see what type of premium they can get for another $100 strike price and consider doing it again.
Some look at the writing covered call strategy as a potential monthly income generator.
Where Money Calendar comes in for Options Traders, Specifically Covered Call Writers
Below is the data from www.tomsoptiontools.com.
It shows that 9 of the past 10 years RJF has run higher in price from today’s date until November 06, 2023 (it is actually calculating trading days, but we use calendar dates to help sync up calendar dates to set up trade more efficiently).
What this shows is that if one picked up the stock say at $100 and waited for the Money Calendar pattern to play out (if it does – no guarantees), one can anticipate RJF running up another $3.51.
Why write the call at $100 and potentially lose out on the price gain? Why not wait for the pattern to play out and look to write or sell a higher-priced call option strike when it gets up there?
That’s a rhetorical question as one can wait for the price increase and if it happens THEN look to write a call at a higher strike price closer to the then higher-priced stock price.
This gives on the opportunity to still write a covered call and get paid a premium for doing so and gives them the chance at getting called out (sell the stock) at that later strike price and getting two paychecks: one for writing the call and getting called out/selling the stock if it does.
Looking over this scenario one can say they own 100 shares of stock at $100 and later, as it gets closer to November 6 end date (as shown in Money Calendar data) consider writing a November 17 strike at say $105.
The target price on the stock can be calculated as taking the current $100 price and adding the avg. profit move shown by Money Calendar data of $3.51 making the target $103.51.
Writing a Nov. $105 Call may bring in $2.00 later should it make the anticipated move higher.
Now one gets paid $2.00 or $200 for the sale of the option. If the stock makes its move it still has he chance of NOT getting called away or bought, but one can consider selling the stock for up to $3.51 higher. That would be a total of $5.51 or $551 or a now 5.5% ROI.
If one doesn’t sell it they can look to repeat again for December.
No matter what knowing some seasonal history for the price pattern tendency of a stock that Money Calendar provides can help one determine when and at what strike price to sell, which could mean making even more money.
— Tom Gentile
C1P: Chief 1-Percenter
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