OT: Magic Price Button (Covered Calls)

Investment Analysis Clubs Macro Economic Trends and Risks
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Investing is hard because prices do mostly a random walk and random is hard to systematize except for the long run. Insurance is a great example, claims happen at random but over the long term actuaries can figure it out. The stock market equivalent would be index funds or buy and forget stocks. The problem is us! Our itchy fingers trying to make sense of random walks.

Back in 2007 I read Option Volatility and Pricing: Advanced Trading Strategies and Techniques by Sheldon Natenberg. This book teaches how options work which lets the reader make up his own trading strategies. I came to realize that selling options has a lot in common with selling insurance and with gambling casinos. Unlike with stocks, the seller has a lot more control over the operation. When stocks go up one has unrealized gains. When one sells calls one has cash in hand. There are thousands of stocks and people wanting to buy call options in the hope of a quick profit to beat the market. Of those thousands one only needs a dozen or so. The problem is the needle in the haystack, how to find that handful on a continuing and reliable basis. To solve that problem the Covered Call Selector was born. It works rather well once one feeds it a sufficient number of option chains to work with. i had been hand picking a selection averaging some 50 stocks at a time but I wanted to increase the number. I used a Yahoo stock screen, certain industries, positive earnings, and price between $10 and $100.

The screen plus my older picks now adds up to over 250 stocks to work with. Downloading the option chains from the CBOE website is cumbersome. One needs all the help one can get which led me to create a new list.

One of the thinks that bugs me is that links take you to only one destination. While researching stocks one wants to look at several sources so I created the MultLink:

multilinks
multilinks1100Ɨ544 114 KB

Now I can look at the chart, at the earning date, or go to download the option chain, all from one place.

Entering 250 stocks by hand is cumbersome so the list has two input modes, one stock at a time and uploading .csv files

input
input1872Ɨ980 161 KB

As you can see from the screenshot, the stocks show the price which the script downloads from Yahoo. That works perfectly when itā€™s one stock at a time but the .csv file upload overwhelms Yahoo. To solve that problem I created the Magic Price Button. Click the button and up comes the latest price from Yahoo and it also updates the listā€™s database. For the curious, itā€™s AJAX technology.

I finished coding the list today. Tomorrow some of my calls expire and will be assigned. That gives me the weekend to try out my new toy and maybe sell some calls on Monday.

The Captain

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Hi Captain,

Thanks for the post. Is there a website where we can see your candidates for covered calls?

Thank you,
Charlie

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@captainccs I applaud your creativity and skill and wish you lots of success and profit. I would love to piggy-back on your method. Is there a way to share?

Wendy

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No. But itā€™s a darn good question that we have talked about in the recent past. A big part of the problem is access to stock market data. The big boys donā€™t make money investing, they make money by managing our money, by selling us ā€˜productsā€™ like mutual funds, ETFs, financial advice, brokerage fees, market data, and the like. One can get a trickling of free data but for heavy lifting data one has to pay. The stock price data from Yahoo is free to download and so is downloading individual 15 minute delayed option chains from the Chicago Board of Option Exchange (CBOE) but it comes with restrictions, they donā€™t want us to compete with them without taking their pound of flesh, and who can blame them? There is no free lunch!

It would take deeper pockets to convert my software into a sellable product/service on the WWW. Iā€™m not entirely new to that world, I tried to sell Venezuelan software to Silicon Valley between 1985 and 1990 and I had a lot of fun doing it but failed in the end. Itā€™'s a tough Valley to deal with.

The Captain

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Thanks Wendy! My reply to Charlie covers some of the hurdles. I wonder how many regulatory and legal hoops one would have to jump though to make it publicly available. I donā€™t have the youth or the funds to give it a try. Can you put me in contact with angel investors?

The Captain

When I gave Silicon Valley a try I was a youthful 47!

Sadly the images are gone as well as some code at the bottom!
http://preserve.mactech.com/articles/mactech/Vol.03/03.11/HelpSystem/index.html

We even were mentioned in a patent litigation

B. The Invention is the same as the invention presented in Denny Schlesinger, ā€œHelp Documentation System Reviewā€ (MacTutor, the issue of November 1987) (Exhibit Otsu No. 13-1; Exhibit Ko No. 20 is a complete translation of Exhibit Otsu No. 13-1; hereinafter referred to as ā€œOtsu Document No. 13ā€) (hereinafter, said invention shall be referred to as ā€œInvention Otsu No. 13ā€).

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Making it publicly available isnā€™t hard. It is trying to make it an ongoing profitable business (without losing it to competition, fake web sites, etc) that is the hard part.

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Thanks Captain.

I understand the potential issues. So, would you be able to say what criteria yo use to pick your candidates?

I see some already -

Could you share how you further process this? I am guessing there will be loads of stocks with positive P/E and in that price range.

Also, do you only do weeklies? And how do you choose your premium targets.

Sorry, lots of questions but just wanted to understand if possible

Thank you,
Charlie

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The first thing to understand that what Iā€™m describing is not investing in the traditional sense of the word. I was going to call it ā€˜arbitrageā€™ but that word does not fit either.

arĀ·biĀ·trage | ĖˆĆ¤rbəĖŒtrƤZH |
noun
the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset: [as modifier] : profitable arbitrage opportunities.

As I mentioned earlier, Iā€™m modeling this trading system after the mathematics of gambling casinos acting as the house while the call buyers are the gamblers. They place bets in the hope of buying stocks at a discount. Since the objective is to earn the premium I donā€™t care about opportunity loss, more on that later, the only remaining risk is capital loss should the underlying stocks crash. This dictates the selection of the underlying stocks.

  • Stocks that are flatlining or rising
  • Stocks that will not be whiplashed by earning calls
  • Stocks in a price range that allow some diversification - depends on the available cash to plsy with

As with many if not most enterprises one needs an inventory to work with, in this case a list of stocks that have propitious calls which is what I have been working on this week. Over time I have been building the inventory list based on traditional investing criteria. The Yahoo screen did yield a few candidates a but way too many duds. Many of the stocks do not have options. Other only have only monthly options.

After downloading the initial 30 option chains on the Yahoo list I ran them through the Call Option Selector. The ones without weekly options did not pass the minimum selection criteria. The CBOE is a business, they try to issue options that will attract trades. They create weeklies for stocks that traders like. Traders like stocks that make them money, The more bullish traders are on a stock the more they will pay for the call options, simple law of supply and demand. My objective is to sell the highest yielding call options. Itā€™s the best use of available capital.

Based on the above experience I stopped downloading option chains that only had monthly options with a few exceptions, stocks that I had experience with as good call option candidates. The 250 list I talked about earlier is now reduced to 54.

AEHR, ATVI, CSIQ, DELL, DOCU, DOMO, ENPH, FTNT, GDDY, GFS, GLBE, GLW, HPQ, IOT, JKS, JNPR, LSCC, MCHP, MTCH, MTSI, MU, MXL, NCR, NEOG, NET, NTAP, OKTA, ON, POWI, PSTG, PYPL, RIVN, RNG, ROBO, ROKU, RUN, S, SHOP, SLAB, SMAR, SMCI, SMTC, SNAP, SPWR, SQ, STNE, SWKS, SYNA, TDOC, TTD, TWLO, UPST, ZI, ZM

Once one has such a list there is not much sense in searching for more but one sure can add candidates that pop up on boards like Saulā€™s. He is a great stock picker!

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Once one has the above infrastructure itā€™s a question of picking out the best calls on offer depending on the amount of cash one has to work with. Thatā€™s where the Covered Call Selector comes in

  • Download the option chains from the CBOE website: VIX - Delayed Quotes
  • Run the Call Option Selector. This weekend the default settings picked 651 options corresponding to 37 stocks.
  • To reduce the number tighten the selection parameters until there is manageable number of options left, in this case nine.
  • Before you commit, check for the capital loss risks mentioned above.
  • Transfer the data to a spreadsheet to fine tune the final selection, four in this case. Iā€™m working on a web page to replace this last spreadsheet.

There are three main selectors

  1. Cash: The cash generated by the optionā€™s premium
  2. Dollars per day: Since the expiration dates differ the cash amounts are not comparable. This metric shows the amount earned daily by each option.
  3. Discount: Premium over stock price

A note on Opportunity loss

The default selector is set for at the money (ATM) options. It can be set for ITM or OTM. During bull markets you can set it to OTM to try to capture some of the stockā€™s appreciation. Not recommended. Itā€™s best for the options to be assigned and to start each week with a clean slate.

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By the time one is ready to trade the stock and option prices have changed. From here on one has to play to by ear.

The Captain

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