Selling Covered Calls

This is a discussion on Selling Covered Calls within the Futures & Options forums, part of the Markets category; Originally Posted by jimbo45 Hi there When doing options you need a DIFFERENT mindset. ... Please stop this, jimbo... Honestly, ...

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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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Old Oct 1, 2011, 1:42am   #22
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Re: Selling Covered Calls

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Originally Posted by johnard View Post
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.
don't kid yourself into believing that this is a way to make good income. i would urge anybody considering this ridiculous strategy to backtest their trades and see how you would have done in the past months and see how much money you would have lost. plus, as a bonus, with this strategy you are left with a basket of losing stocks while your winning stocks are breaking to newer highs but you cannot participate in the upside past the short call strike. not good.
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Old Oct 1, 2011, 4:40pm   #23
 
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Re: Selling Covered Calls

I suppose selling OTM covered calls are bonuses for investors who are not intending to sell their shares. Obviously there is that risk if the stock suddenly became very bullish or bearish.
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Old Oct 1, 2011, 7:56pm   #24
 
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Re: Selling Covered Calls

when you sell options you gonna make sooooooooooooooooo much money...
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