Trade Using Data Not Emotions or Guesswork

Options Trading Recipe – Trade Using Data not Guesswork PART 6

When I make my batter for my gluten free dark chocolate banana bread, I don’t guess at the measurements of the ingredients. I use 3/4 cup of sugar, 1.5 cups of gluten free flour, 1/2 cup of dark chocolate chips and so on. The only thing I don’t measure are the bananas. I just use three of them or perhaps four if they are smaller bananas. Guessing the quantity of each ingredient works for some bakers, but not for me. Investing is like that.

Each investor should determine their own set of requirements (or ingredient quantities) for buying and selling stocks or ETFs. If the list is too long, you will be unable or too drained to act because of the effort involved. That is why I have a short list of requirements when I buy an investment.

In the same way, I created my own list of data points to examine before I enter a covered call option (CCO) trade. In today’s post I want to talk about the things I always examine before I enter a trade.

Be Aware of Upcoming Earnings Reports

The earnings date is the first thing I want to know. If today is December 30, 2022, I don’t want to be reckless in selling a CCO for a stock that reports earnings the first couple of weeks of January 2023. There are two reasons for this. First, a good earnings report can cause shares to charge higher than what I might earn from selling options with a contract price that was too conservative.

In the same way, if the earnings report is less promising than expected, I don’t want to have a long term CCO contract hanging over my head if I want to sell my shares for some reason sooner than the contract end date. Therefore, as a general rule, I want to avoid selling CCO contracts that expire after an upcoming earnings announcement date. However, it is OK to break this rule, if other considerations are in play.

The following image is a look at all of our positions that have an earnings announcement date in January. This is shown in the column marked with a green “2.” The thing to learn from this is that I will not be in a big hurry to trade options on any position that will announce earnings in the first two weeks of January. In fact, if the position only trades monthly options, instead of weekly options, I won’t rush to enter a CCO contract.

Several of our stocks announce earnings in January 2023.

Positions that Don’t Pay a Dividend

If a stock does not pay a dividend then I only care about the earnings date.

This extract from my Active Trader Pro software also shows investments that don’t pay a dividend. Those are marked with red numbers. This is significant because I don’t have to worry about missing a dividend by selling a CCO that will potentially take my shares away from me before the Ex-Dividend Date.

What About My Annual Dividend Growth Income?

Another factor that will cause me to be careful is that some of my positions are big contributors to my annual dividend growth income. For example, I don’t want to be hasty with CCO contract sales for ABBV or PFE. They are key positions in our portfolio. However, if I decide I want to lighten up on PFE or ABBV, and take some profits, a CCO can be a great strategy to gain additional income AFTER the dividend is guaranteed.

Note therefore, that ABBV has an Ex-Dividend date of 01/12/23 and PFE has one that is 01/26/23. Therefore, I don’t want to enter into an options contract without considering the impact on my dividend income. If the contract for PFE will pay me $1.00 per share, and the dividend is only $0.41, I might sell the CCO contract. The following two images help you see the pieces I consider. They are the dividend amount and the Ex-Dividend date.

Some of our stocks pay significant annual dividends and these dividends are growing each year.
I won’t sell a contract for less than the quarterly dividend if the next Ex-Dividend date is just a few weeks away.

There Are Times to Lock in Profits

In a bear market I am hesitant to lock in a profit on a position that has fallen in value simply because of the systemic fears and panic selling mentality of the traders.  However, sometimes good news from an earnings report pushes the value of my shares up more than 5% on any given day. Because I have alerts set up, I get an email when that happens. That then becomes a great opportunity to look at selling a CCO contract.

So, for example, we have a large investment in Pfizer (PFE) shares. If the earnings report on January 31 is amazing, the shares might shoot up 5-6% or more. If that happens, I will look at selling a CCO on that Tuesday. Instead of selling one for $53 (the current stock price is just over $51), I will raise my expectations to shoot for $55-56 per share.

We have $81K invested in ABBV. I might sell a CCO for 100 of my 500 shares to lighten up a bit. We have even more invested in PFE, so I will trade CCOs on those shares from time-to-time.

My Worksheet Keeps It Simple

Although I keep track of information in Excel, you don’t have to do that. You should just create some columns on a piece of paper and record the information that matters to you. Here is an example to illustrate the data pieces I collect, and three potential contracts I could enter today, if I did not know there was an upcoming earnings date and an upcoming Ex-Dividend date. In my next post in this series I will talk about the numbers in blue and where I got those numbers.

For now, notice that each contract has a contract price of either $53 or $52. These contract prices are above the current market price for PFE shares. However, these prices are not much higher than the current market price, so this is for illustrative purposes only.

Notice the values but don’t worry about where they came from.

Notice also that PFE trades weekly, so I was able to experiment with three different contract expiration dates: January 6, 13 and 20. These are, as you will recall, all Friday dates. (Weekly contracts expire every Friday and monthly contracts expire on the third Friday of the month.) Notice that the potential income I can receive from each 100-share contract increases as I extend the contract date, giving the contract a longer life. The income can also increase by lowering my expected sale price from $53 to $52. At this point don’t worry about where these numbers came from, as I will talk about that next time.

Links for Learning

Do you want a bird’s eye view of options expiration dates? Then this link is helpful:


The “Options Stop Trading” is when the monthly options expire for a month. So, if a stock only trades monthly options, then the monthly options expire on January 23, February 17, and March 17 in 2023. This same third Friday logic prevails for every month. It is also helpful to remember that the stock market is closed on holidays, so it is impossible for stocks or options to trade on those dates. Weekly options contracts can expire on January 6, 13, 20 , or 27. I like trading stocks with weekly options because I can gain income every week.

Source: MarketWatch