If you paid $39.95 a month for an options trading membership, how much would you expect to make in return?
I think this is the most basic question anyone asks themselves before buying a course, joining a membership or buying any product.
What is the return on my investment in this product?
Well, that’s one of the questions I’ll tackle in the review of my first trade using the Blue Collar Investor premium membership. If you haven’t read about Getting Started with BCI, or what my Membership Review series is about, take a couple of minutes, bounce over to those links and see what I’m up to.
Let’s get started!
What I wanted from the Blue Collar Investor
My trading has focused primarily on covered calls since I’ve started trading options. I’ve dabbled with buying options here and there, but really haven’t swung fully over to that type of trading.
What I was hoping to get from the Blue Collar Investor was a series of stocks from a screener which had good fundamentals and which technically displayed they were likely due for a move up.
I made my purchase for the membership on 9/18 (see the screen shot below) and dug into the Weekly Stock Screen & Watch List the next day.
Getting to know the list
A little like opening a new gift, I clicked on the link for the 9/19 screen and dug in.
I was both amazed and a little overwhelmed at the amount of data within the list. So much so I had to swing back to the membership site to download a PDF Alan makes available to walk a member through how to use the list.
I have to make a quick mention this is a great little bit the BCI team threw in. Expected? Yes. But you don’t always get that attention from other programs. And the level of detail is quite good.
Alan devotes 18 pages to explaining the use of the screen, giving it enough depth to cover the details for beginners, but not so much to be overwhelming. Here’s a screenshot of the table of contents for that product:
After reading through this short PDF, you can definitely tell Alan built his system as he learned the ins/outs of covered call writing. As I was reading through, I could see the various pieces of Alan’s system he probably acquired over time and how he’s weaved them into a coherent system.
I don’t think the language in this instruction is beyond anyone who has gone through Alan’s beginner video series, and it’s definitely accessible for traders with experience beyond the beginner level.
Back to the list.
Armed with the info on how to use the list I read it and came away with 16 different stocks which passed all of the screens and were applicable for covered call writing according to the system.
I’d love to give you the list of stocks, but I want to be respectful of the BCI team since it’s a paid product. However, here’s a breakdown of them as a group:
- Price range: $27.69 – $141.99
- Six different segments (i.e. retail, transportation, etc.)
- Eight pay dividends
- 15 in the top 20% of their segment
- Beta range: .5 – 2.29 (a measure of volatility compared to the market; higher = more volatile)
This list provided me a great degree of flexibility on the stock(s) I could choose to write covered calls against. It’s important to note though…this is a screen NOT a recommendation, suggestion, advice or anything else on which stock to trade with.
It’s important to remember with covered call writing, the risk lies in the underlying stock. When trading covered calls, you become an owner of the stock and are now subject to its ups and downs, for better or worse.
However, for just $14.95 for my first month, I was definitely happy with the product provided and the available explanations on how to put them to use. So much so, I didn’t have to contact the BCI team for help with anything.
So, where do we go from here? We pick one!
Finding the diamond in the rough
Sixteen stocks can still be a little overwhelming to look through and filter to decide which to trade on. For me, it was a little easier since I had limited myself to $5k or less for the stock. This meant I could only trade stocks currently trading for ~$50/share.
This quickly shrunk the list of 16 down to four. Much more manageable.
From this four, I also only wanted to trade a stock which paid a dividend. The logic here is if I get stuck with the stock for a bit, I’m getting paid to hold it as well as writing calls against it. Sure, dividends don’t pay much but they can help offset the cost basis of the stock.
Down to three. Two in the transportation segment and one in the medical.
Hmmm…where to go from here?
Well, digging into the medical stock I could see (and later found it mentioned on the screen too) the options for the stock have very little volume. This goes against one of my fundamental concepts of picking a Popular, Volatile, Established and Cheap stock to trade.
If it’s awkward and a wallflower with few friends like I was in middle school, then I don’t want to trade it! A stock’s options must have enough volume to make the market liquid enough to trade in. Otherwise when you’re trying to get out of a trade, you may not be able to make it in time!
So, now we’re down to a head-to-head competition.
The tie breaker here was the longevity of one of the stocks on the screen. It had managed to stay on the running list for 20 weeks at that time. My thought process? Surely if it’s been on the screen that long, it must have good fundamentals, great technical indicators to go along and be an overall great pick.
The stock? Trinity Industries Inc (TRN).
The risk lies in the stock
A quick reminder, the stocks presented from the Blue Collar Investor screen are the results of a screen, not a recommendation to actually trade against. And as I’ve mentioned before, the risk in making covered call trades lies in the stock you sell the call against.
Okay, so with that in mind let’s dive into my Trinity Industries trade.
I placed some trust in the BCI screen, but I wanted to verify some of the information myself. I admit the technicals looked okay, but nothing to write home about. The MACD, a commonly used technical indicator, was starting to move in a negative direction, but nothing too bad.
Having taken a quick glance at that technical indicator plus a few extra, I decided to go ahead and give the stock a shot.
I entered into a covered call on TRN on 9/25/14, a Thursday, with a cost basis of $4,802 for 100 shares, and sold an Oct 14 47.50 Call for $1.79. This translates into $179 with the 100 shares. Awesome!
This translated into a 2.7% return on the option sold and gave me 1.3% in downside protection. Which means, the stock could drop that much and I’d still break even on the trade.
From there, however, TRN fell off the cliff. See the chart below.
The top green arrow is where I first entered into the TRN covered call trade and bought the stock. As you can CLEARLY see, it didn’t go up. The other two arrows represent two other calls I sold against TRN. Now let’s take a look at TRN with an overlay of the S&P 500 during the same time frame.
As you can see, TRN went the way of the general market. Over the past few weeks, the market has generally been selling off and TRN did the same.
Just in case you’re wondering, this isn’t how you typically want a covered call to go. To top it off, this brought back some pretty rough memories of how my CLF trade started off.
So what are your options when the stock you pick starts “misbehaving”? Well, luckily the BCI team provides you with a few exit strategies for your covered call trading.
What’s your Z-day strategy?
Some people plan for how to get out when the zombies attack or when aliens descend from the sky. You’ve got to plan for how you’re gonna get out of a trade…before you even make the trade.
The BCI team gives some suggestions for exit strategies within the membership section. There are a couple applicable to this situation.
The first is called “hitting a double”. Basically it means you sell a covered call, as I did, the stock drops, which means the option is now near worthless, so you buy it back. You then resell the same strike price, same month option again (or one close) in anticipation the stock just had a “hiccup” and will recover.
This is what I did based on the information I was reading about the company and how it is fundamentally okay.
But the market didn’t agree and it continued to drop, as you can clearly see.
The second strategy suggested by the BCI team is to buy back the option you sold and sell off the stock to gain back cash to enter into a different position. Of course, if you take this course you will lock in the loss on the stock, but it may also save you from future losses.
Prior to getting into the trade I decided to stick with the stock through the period of the BCI trial timeframe unless it was called away from me.
In this light, I decided to continue to sell calls against TRN and continued to receive a good premium for my troubles. The chart below shows the three trades I’ve made so far against TRN.
|Strategy||Underlying||Option||Entry Price||Exit Price||Commission||$ Gain/Loss||% Gain/Loss||# Contracts|
|Covered Call||TRN||Oct 14 47.50 Call||$1.79||$0.40||$13.95||$125.05||70%||1|
|Covered Call||TRN||Oct 14 42.50 Call||$1.79||$0.30||$10.08||$138.92||78%||1|
|Covered Call||TRN||Oct 14 40 Call||$0.80||$0.10||$10.08||$59.92||75%||1|
On the surface this may look good, I made $323.89!
But let’s take into account the current value of TRN as of this writing, which is $34.02. This equates to a loss of $1400 in the stock’s value as of 22 Oct.
So, do you judge this a success or a total failure? I say, it’s how you handle the situation from here on out.
It’s good to have options
One of the best things I’ve learned about trading options is there are a variety of ways to fix situations which look like they may be totally lost. Of course, your willingness to go down a particular path will be based on your risk tolerance.
My view on the TRN trade is the “loss” on TRN is unrealized, meaning it won’t be a real loss until I sell the stock off. Of course, this means I believe TRN will make enough of a recovery to eventually sell off.
With the $323.89 made from selling calls, the adjusted cost basis for TRN is $4,802 – $323.89 which is $4,482.06, or $44.82/share. What does this mean?
This means, if today I sold a call with a strike price of $45 I would make $.18/share plus whatever I sold the option for (i.e. $179 as with the first call).
Unfortunately, as of close of the market today on 23 Oct, TRN is sitting at $36.46 which is a difference of $836.06. This means I’ll have to continue to sell calls against TRN to drive down the adjusted cost basis towards the current market price. Of course, it’s a moving target which makes it all the more entertaining!
So what is my return currently on the membership?
Well, we can answer this question a couple of different ways. You could look solely at the premium I’ve made on the trades, $323.89, and say I’ve made a 2100% return on the cost of the membership.
Or you can look at it from the unrealized loss on the stock and say it’s a loss.
I tend to lean towards the first option since the drop in value of the stock is still unrealized. But for now I’ll leave it up to you to decide how you want to look at it. When I’m completely done with my review of the membership towards the end of December, I’ll put up my final thoughts on what the real return is.
I think it’s also worth noting the overall market took a turn for the worse almost immediately after making my first trade. If you take a quick glance back at the last chart, you’ll see the SPY, which is an ETF which tracks the S&P 500, took a plunge as well.
In general, covered calls don’t do well in this sort of market if you’re looking to capture the increasing value of the underlying stock. If you’re holding the stock for years and don’t really care then it is good because the options drop to near zero value quickly, and you can usually sell multiple options within a single month.
Let’s wrap up this option sandwich
Overall, I would say I’m happy with the Blue Collar Investor membership. I think everyone should make the determination for themselves if they think the program is worth their while.
But if a friend asked me for my opinion on whether or not they should join the program, I would say “Yes” at this point.
That wraps it up for this segment of the review!
If you have other questions about the Blue Collar Investor’s membership program I can answer, please leave a comment for me below and I’ll answer it as soon as possible!
If you want to be the first to know how my trades with the BCI continue to go, click here to sign up for updates on how trading is going and you’ll find out soon if the system paid off or not!