Selling Covered Calls

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Old Jun 22, 2011, 12:32am   #15
Joined May 2006
Re: Selling Covered Calls

willmoss started this thread
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You have a portfolio of stocks. You hold each stock for one or both of the following reasons:
1) The stock has an appropriate dividend yield to justify committing capital to it, and you do not see that the price is likely to fall enough that you take a loss
2) The stock has good potential to increase in price over your holding period, sufficient to justify your committing capital

In other words you expect the market to move either sideways, but be compensated by the dividend yield, or up.

Selling a call against your holdings achieves the following:

-if a stock you hold for appreciation purposes is called away, you were correct on holding the stock but have now sold it on "too cheap". You either repurchase at a dearer price to resume your initial position, or you lose your position entirely.

If you don't mind losing your long position in a stock, why do you own it?
Yes I agree with what you are saying.So you buy a share and sell options. If the share goes up, you loose cause you sold the option. If the share goes down you loose cause you own the share.

I guess what I was saying was that it all depends on the price of the option vs probability of appreciation. I mean if you price the option high enough then even if the stock appreciates you make money up to a point. And you could also set the strike price in order to decrease the probability of the option being exercised on stock appreciation.

So you can make money? I take back anything about a gauranteed way to make a buck. I guess it all depends as ever on demand, but surely there are some markets out there where by carefully choosing the strike price & option price based on historical probabilities of asset appreciation/depreciation, you can make money?
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Old Jun 22, 2011, 7:13am   #16
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Re: Selling Covered Calls

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Originally Posted by willmoss View Post
Yes I agree with what you are saying.So you buy a share and sell options. If the share goes up, you loose cause you sold the option. If the share goes down you loose cause you own the share.
Correct. Not only is it lose-lose, you pay two sets of commissions - one on the stock leg, and one on the option leg. Any guesses why this strategy is marketed to the public. Do you think professionals use covered calls (and no, I don't mean mediocre fund managers hedging their bets because they can't reliably pick stocks).

Have you considered that the payoff is identical to naked short put, the risks are the same, and the well known shortcomings of that strategy also apply?

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Originally Posted by willmoss View Post
I guess what I was saying was that it all depends on the price of the option vs probability of appreciation. I mean if you price the option high enough then even if the stock appreciates you make money up to a point. And you could also set the strike price in order to decrease the probability of the option being exercised on stock appreciation.
You don't price the option. There is a mid market price for every traded option with a live bid/offer. You can "price it" however you like, but unless you are in the same neighbourhood as the BBO, you won't get a fill!

Take a look at some option prices yourself, and maybe do some paper trades. You will find that the further OTM the strike, the less probability of being called away, but the lesser premium you receive. Conversely to receive a decent premium, you must price closer to the underlying (less OTM and certainly not DOTM) which increases the likelihood of being called.

Quote:
Originally Posted by willmoss View Post
So you can make money? I take back anything about a gauranteed way to make a buck. I guess it all depends as ever on demand, but surely there are some markets out there where by carefully choosing the strike price & option price based on historical probabilities of asset appreciation/depreciation, you can make money?
That is good - now you are thinking rationally instead of having any expectation of a free lunch. Plenty of resources out there about options - make sure you understand the terms and the mathematics, along with what each position represents, before going hunting for strategies. Further, if a strategy is published, it is likely to be no good. There is no free lunch in strike / expiry selection. However picking the correct aspect for both is necessary to profit.
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Old Jun 22, 2011, 3:18pm   #17
 
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Re: Selling Covered Calls

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Originally Posted by jimbo45 View Post
Hi there

When doing options you need a DIFFERENT mindset.
...
Please stop this, jimbo... Honestly, this is just wrong.
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Old Aug 2, 2011, 8:15pm   #18
 
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Re: Selling Covered Calls

Whats wrong with this Martin it seemd JIm has a good way to trade options,

Is this not a good way to trade them?

Alex UK
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Old Aug 2, 2011, 10:03pm   #19
Re: Selling Covered Calls

a covered write is simply a synthetic naked put.
if you are long the underlying you are synthetically (long call/short put)
by selling a further otm call against your stock you are simply putting your self in a call spread with a naked put.

so lets say you have a futures contract in which you are long at 100
and you decide to sell the 105 call

synthetically: you are long the 100/105 call spread and short the 100 put

what is wrong with the strategy? writing the call against you limits your upside and you are still exposed towards the underlying moving lower.

so you are not hedging your position you are collecting some premium if the market stays puts or declines. But if the market has a huge down move you are not protected.

So the covered write is the same thing as having a naked put. Ask yourself would you feel comfortable having a naked put on? if the answer is yes than the strategy makes sense. If you are doing it because you feel like you are putting on a hedge then the answer is no.

One step up from this strategy is the Collar.
example: Long the Underlying/Short a further OTM Call/Long an ATM put

Say you are long the underlying at 100 (synthetically (+1)100c/(-)100p
if you sell the 105 call and buy the 100 put
your synthetic position is a bull call spread (+1)100/(-)105c
(the put cancels out the synthetic short put you have)

So basically the collar protects you against a downside move. limited risk/limited profit potential. Downside is that it is more expensive because you have to purchase the put.

Everything is really a question of risk vs. reward.

A more sophisticated strategy which is notch above the collar and the covered write is the slingshot hedge.

long underlying/short some otm call spreads/long put
similar to the collar except instead of selling a call, you sell call spreads. by selling the call spreads you still leave yourself with the potential for unlimited gains.

Nothing wrong with the covered write, just understand that you are not hedged if there is a big down move. Synthetically its a naked put. The collar is a synthetic bull call spread, limited risk with limited profit potential. More protection.

Another strategy is the married put. In which you buy puts against your long underlying. This is a synthetic call option. Limited risk, unlimited profit potential. More expensive because you are buying puts but the rewards are greater.
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Old Aug 3, 2011, 3:49pm   #20
 
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Re: Selling Covered Calls

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Originally Posted by AlexFX007 View Post
Whats wrong with this Martin it seemd JIm has a good way to trade options,

Is this not a good way to trade them?

Alex UK
No, it's most definitely not a good way to trade them... In fact, it's downright silly.
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Old Sep 30, 2011, 10:01pm   #21
 
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Re: Selling Covered Calls

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Originally Posted by hoodoo man View Post
This may be completely retarded. Why do you want to write call options on your stocks?
If you short OTM calls on your stock and the price does not meet the OTM strikes by expiration you get to keep the premiums. Do this every month you could make a nice income.

On the other hand if you get exercised on your OTM short calls you still make capital gains because your stock has gone up and you have collected the premium.
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