Selling stock options is all about generating a cash flow. Calculating our initial profit, the potential for more profit (upside potential) and the protection of our initial profit (downside protection as opposed to breakeven of the entire position) is critical in making the most educated investment decisions. Accessing this information from the "Multiple Tab" of the Ellman Calculator will assist us in stock, option and strike selection.
This spreadsheet allows you to evaluate multiple equities and multiple strike prices all on one page. The spreadsheet below depicts a typical page with information filled in and results shown:
Enter the required information in the left five blue columns. These statistics are derived from the options chain:
- Stock symbol
- Stock price
- Option premium
- Strike price
- Expiration date
The "multiple tab" is the tab that I use the most. When deciding on which financial soldiers to send out into the investment battlefield for a particular month, this page allows us to compare a myriad of stocks and their corresponding potential option returns, upside potential and downside protection. In this example, one glance of the page will show us:
- Option sales with the greatest initial returns (ROO)- time value of option premiums
- Highest upside potential- from stock price to strike price for out-of-the-money strikes
- Best downside protection- intrinsic value of in-the-money strikes
We then make our decisions based on market tone and technical analysis. In the chart above, we see, highlighted in yellow, out-of-the-money strikes which offer excellent initial option returns and the possibility of significant additional profit from share appreciation. The areas shaded in green represent in-the-money strikes which also provide outstanding 1-month returns, no upside potential but significant downside protection. It is important to note that when I refer to "downside protection," I am referring to protection of the time value of the option premium, not the overall position. When we sell an option, the protection of the total position, or breakeven, is the entire option premium.
Favor yellow highlighted stocks:
- Bull markets
- Outstanding technical picture for the stock
- An example would be NFLX (2nd row from top) which generates a 3.5%, 1-month return with 6.7% upside potential (additional profit possible)
Favor green highlighted stocks:
- Slightly bearish or volatile market tone
- Mixed technicals for that equity
- An example would be URBN (2nd row from bottom) which generates a 2.1%, 1-month initial return with 5.7% protection OF THE INITIAL PROFIT
Using the "multiple tab" of the Ellman Calculator is a great tool to assist us in making our covered call writing decisions.