Sample Trade Video: Aggressive Covered Call Writing Trade with EBAY

Summary

In this video, Alan Elman, the Blue Collar Investor, walks through an aggressive 3-week covered call trade with eBay. He explains the selection criteria for eBay, focusing on its low implied volatility, bullish indicators, and favorable earnings and dividend dates outside the trade's expiration. By using an out-of-the-money 69 strike, Alan aims to generate two income streams: from option premium and potential share appreciation. The trade offers a 1.34% return over 19 days, with the possibility of nearly 4% if eBay rises to or above the strike price. The trade remains promising with 12 days left until expiration.

Takeaways

• 😀 Allan Elman introduces the video as a sample trade from his premium stock report, focusing on an aggressive 3-week covered call writing trade with eBay.
• 😀 The trade was executed on February 6th, 2025, and the stock was eBay, with a strike price of 69 and an expiration date of February 21st, 2025.
• 😀 Elman defines the trade as aggressive because it uses an out-of-the-money strike, providing two potential income streams: from option premium and share appreciation.
• 😀 eBay's stock price at the time of the trade was 67.35, and it had been on the premium watch list for three weeks.
• 😀 eBay was selected due to its relatively modest implied volatility of 23.4%, lower than other stocks on the watch list, reducing risk but also lowering potential premium returns.
• 😀 eBay is part of the retail sector, which is ranked in the top 20% of industry segments, a positive factor for the stock's selection.
• 😀 The mean analyst rating for eBay was 2.67, which meets the BCI criteria of 3 or lower.
• 😀 The on-balance volume indicator showed a bullish trend, with more cash flowing into the stock on up days than on down days.
• 😀 The next earnings report for eBay is on February 25th, which is after the option's expiration date, meaning it won't affect this trade.
• 😀 The next dividend ex-date for eBay is February 31st, but since it falls outside the expiration date, it is not a concern for the trade.
• 😀 The trade returns an initial 1.34% for 19 days, which annualizes to 25.67%, with the potential for an additional 2.45% if eBay's stock price moves up to the 69 strike price.
• 😀 As of the video creation, eBay's stock price had risen slightly, and with 12 days remaining until expiration, the final results of the trade are still uncertain but positive so far.

Q & A

What is the main strategy discussed in this video?

The main strategy discussed is aggressive 3-week covered call writing, where an out-of-the-money strike is chosen to potentially generate income from both option premiums and stock appreciation.

Why is the term 'aggressive' used to describe this trade?

The term 'aggressive' is used because an out-of-the-money strike is selected. This creates a situation where the stock can appreciate up to, but not beyond, the strike price, allowing for multiple income streams. A more defensive approach would involve selecting an in-the-money strike.

What key factors made eBay a good candidate for this trade?

eBay was selected because it had a relatively modest implied volatility (23.4%), was in the retail sector with a strong industry ranking, had a bullish on-balance volume, and its next earnings report and X date were both beyond the option expiration date.

What does the implied volatility of 23.4% indicate?

The implied volatility of 23.4% means eBay is expected to move up or down by that percentage over the next year, with a 68% probability of staying within this range. This is considered lower risk compared to stocks with higher volatility.

What was the price of eBay at the time of trade execution?

eBay was trading at $67.35 at the time the trade was executed.

What strike price was chosen for the covered call?

The chosen strike price for the covered call was $69, which was an out-of-the-money strike compared to the current market value of $67.35.

How much premium was collected for the $69 strike covered call?

The premium collected for the $69 strike covered call was 90 cents per share.

What is the potential total return for this trade if eBay goes up to the $69 strike?

The total return could be as high as 4% for the 19-day trade if eBay moves from $67.35 to $69 or beyond, combining both the option premium and stock appreciation.

What tool does Alan use to manage the trade and perform calculations?

Alan uses the BCI Trade Management Calculator (TMC) to calculate and manage the trade, which helps estimate potential returns and guide decision-making.

Why is it significant that eBay's earnings report and dividend X date are beyond the option expiration date?

It's significant because it ensures that the earnings report and dividend distribution do not interfere with the trade, which is set to expire on February 21, 2025.