Selling Covered Calls

willmoss

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Hey guys

I want to sell covered calls. Can u give me some advice about how I can do this/ the best way?

I have a pretty small portfolio, about £20k of stocks and would like to write call options on pretty much all of my stocks.

My broker is TD Waterhouse but AFAIK they don't allow selling of options, only buying? If this is true it is ****ing annoying cause tbh this seems like an easy way to make some extra cash for any investor...

Anyways, I noticed that Interactive Brokers allow this so I am thinking about signing up with them. BUT I am guessing I will have to xfer my entire stock portfolio to IB, which will be very annoying as I am totally happy with TD Waterhouse atm. Plus I am guessing there will be fees and annoying admin to deal with.

Soooo.... can ne1 who has done this give me some advice?

EDIT: also apparently these brokers support it as well:

optionsXpress
TD Ameritrade
Scottrade
TradeKing

Best direction to go with this? Any ideas? Thx
 
well first thing, why would you need to transfer your shares to Interactive Brokers? All you have to do is work out how much profit you want to lock in and execute the options trade on Interactive Brokers. You do know that by selling a call option on a portfolio of stocks means you are effectively taking profit on that portfolio because if that portfolio of stocks was to rally and the stock index you have written the call option on goes in the money, you will lose money. Selling options is not free money, if it were we would all be billionaires. There are enormous risks to selling options, so much so that some banks are not actually permitted to having net short position in certain options as a result of the credit crunch. As you are effectively securing your short call option position against your portfolio of stocks, your risk is reduced. Option prices change just like any other asset class, skew and vol changes can cause huge losses and this will affect the margin you have to post against that short option position with your broker. So make sure you have done all your research before deciding to go ahead with this "easy way to make some extra cash".
 
I'm pretty certain TD Waterhouse allows option trading, you just need to be approved for it. Usually covered calls only requires level 1 approval. You should double check with your broker. I haven't used them personally so I can't be certain but I know that TD Ameritrade allows options trading...
 
well first thing, why would you need to transfer your shares to Interactive Brokers? All you have to do is work out how much profit you want to lock in and execute the options trade on Interactive Brokers. You do know that by selling a call option on a portfolio of stocks means you are effectively taking profit on that portfolio because if that portfolio of stocks was to rally and the stock index you have written the call option on goes in the money, you will lose money. Selling options is not free money, if it were we would all be billionaires. There are enormous risks to selling options, so much so that some banks are not actually permitted to having net short position in certain options as a result of the credit crunch. As you are effectively securing your short call option position against your portfolio of stocks, your risk is reduced. Option prices change just like any other asset class, skew and vol changes can cause huge losses and this will affect the margin you have to post against that short option position with your broker. So make sure you have done all your research before deciding to go ahead with this "easy way to make some extra cash".

Good post. Options is not an easy way. Many pitfalls. Options are very mathematical instruments.
 
I believe your stock portfolio and option trades must be done at the same broker. Otherwise you should be required to keep heavy margin when selling calls. It will be treated as naked short selling. If they are done at the same broker, you wont need to margin since you already own stock. (you are covered). My general advice is to write short term calls (every month) and repeat this as long as they are not exercised. You may choose strike price of calls beyond heavy resistance levels. Also a sister strategy maybe selling put options on stocks which you may consider to own. Let say you would love to own AAPL stock at 330. So you sell 330 puts. If AAPL falls below 330, you are exercised and buy AAPL at 330. If not, you keep your option premium.
Regards,
 
My general advice is to write short term calls (every month) and repeat this as long as they are not exercised. You may choose strike price of calls beyond heavy resistance levels. Also a sister strategy maybe selling put options on stocks which you may consider to own. Let say you would love to own AAPL stock at 330. So you sell 330 puts. If AAPL falls below 330, you are exercised and buy AAPL at 330. If not, you keep your option premium.
Regards,

My recommendation is to not sell puts just on their own. Better to do a credit Bull Put spread. This protects against gap downs.
 
Hi there
OptionsXpress are fine for options trading. For Non US residents you need to sign the Federal Witholding Tax exemption Certificate - you'll get this when you apply to open an account -- No money needed to open the account.

Costs -- 9.95 USD to trade stocks etc. 14.95 USD for the options.

This exchange also allows you to trade WEEKLY options.

There's nothing wrong with SELLING PUTS either --if you find a stock that you wouldn't mind holding for a while at a certain price then sell a PUT on it. Say you are happy to buy a stock in a company at 22.00 USD and there is a PUT available at the STRIKE of 22.00 USD for which you get a premium of 0.41 C then even if the shares are PUT to you you have effectively bought these for 21.59 USD a share.

If they now start rising just sell a CALL on them.

Incidentally I've found that the share price can go quite a way UNDER the strike price before its PUT to you -- the biggest mistake people make --even experienced traders too -- is to "Chase" losses or hold in the hope of recovery so Market Psychology will often prevent people from selling shares that incur them a loss -- take advantage of this when SELLING PUT options.

The Ideal share is a fairly steady SLOWLY rising one so you can keep getting WEEKLY Premiums on selling CALLS.

CBOE has a list of WEEKLY tradeable entities.

http://www.cboe.com/micro/weeklys/introduction.aspx

I've got an EXCEL spreadsheet with the current set of weeklys on it and a calculator -- you need EXCEL 2007 / 2010

Click the Update prices Button then slect the share and have fun with the calculator -- don't pay big bucks for stuff you can do yourself quite easily. You don't need a huge amount of programming skills to use EXCEL to get FREE DATA from the web.

I've attached the excel calculator for you and the image.

Column A has most of the weekl tradeable stocks -- I've not included various tradeable Indices on it.

Cheers
jimbo
 

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Hey guys

I want to sell covered calls. Can u give me some advice about how I can do this/ the best way?

I have a pretty small portfolio, about £20k of stocks and would like to write call options on pretty much all of my stocks.

Best direction to go with this? Any ideas? Thx

This may be completely retarded. Why do you want to write call options on your stocks?
 
This may be completely retarded. Why do you want to write call options on your stocks?

First of all, thanks for the replies. Its been great to get some more info on this cause I couldn't find anything on the net.

To answer your question, I will explain where I'm coming from. Also to give everyone else an idea so that my logic can be tested in case it is screwed up (I am not a professional trader).

So lets say you have a portfolio of stocks which you are long (ie. you are going to hold them for the foreseeable future).

Lets also say you want to make more money.

Well the idea is to sell options on your portfolio with a strike price that is equal or greater to what you paid for the stock you hold, including any additional margin for broker commission, forex, etc.

So investor X buys your option. You get paid.

When his option becomes in the money, he buys your share for the strike price and makes a profit. You get paid all your costs for holding the stock plus option commission

If the stock goes down, investor does not exercise option, you keep the stock and make a paper loss same as if you hadnt even sold the option

I guess what you are doing here is taking on the same risk as holding equity but effectively selling the reward in advance, as you get paid immediately for the option. Whether its a successful strategy depends on the option price & difference between the strike price & what you paid for the stock (your profit margin)

That make sense? I am sure that as an individual investor you could do the maths and just sell a whole load of options that were guaranteed to make you more money than just simply holding onto the stock. As long as you work out the correct option price & strike price, surely there is no risk and potential for extra reward?

Pls correct me if I'm wrong
 
To answer your question, I will explain where I'm coming from. Also to give everyone else an idea so that my logic can be tested in case it is screwed up (I am not a professional trader).
the logic may very well be screwed up
So lets say you have a portfolio of stocks which you are long (ie. you are going to hold them for the foreseeable future).

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 dividends is called away from you, you lose the right to receive that income and will need to pay to repurchase the stock
-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?
If the stock goes down, investor does not exercise option, you keep the stock and make a paper loss same as if you hadnt even sold the option
Selling calls against your stock will outperform not doing so when the stock goes down. It will not outperform when the stock goes up. You own stock. Do you own stock that is going up, or down? Why would you entertain strategies which only benefit when the market moves against your long stock positions, but causes you losses when you are correct on long stock positions? Is this not harebrained?
I guess what you are doing here is taking on the same risk as holding equity but effectively selling the reward in advance, as you get paid immediately for the option. Whether its a successful strategy depends on the option price & difference between the strike price & what you paid for the stock (your profit margin)

That make sense? I am sure that as an individual investor you could do the maths and just sell a whole load of options that were guaranteed to make you more money than just simply holding onto the stock. As long as you work out the correct option price & strike price, surely there is no risk and potential for extra reward?

Pls correct me if I'm wrong
There is no "selling the reward in advance". You are selling the right to receive good profits if the stocks you own appreciate considerably. In exchange you earn a few pennies which may or may not be sufficient to compensate you for the risk of holding a stock which could go down. This is a losing strategy on stocks which will appreciate, and on garbage stocks it will only lessen your losses slightly.

Sure, you could do the maths and sell a bunch of options, but there is no such thing as guaranteed to make you more money. I think you are wrong, your strategy is flawed, and you don't have much of a clue. This isn't a crime as we were all born ignorant, but it is folly to risk your hard earned until you do know. You've just fallen for some marketing. Remember that everyone is out to seperate you from your money. Would you consider selling naked puts to be a good strategy?
 
the logic may very well be screwed up


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 dividends is called away from you, you lose the right to receive that income and will need to pay to repurchase the stock
-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?

Selling calls against your stock will outperform not doing so when the stock goes down. It will not outperform when the stock goes up. You own stock. Do you own stock that is going up, or down? Why would you entertain strategies which only benefit when the market moves against your long stock positions, but causes you losses when you are correct on long stock positions? Is this not harebrained?

There is no "selling the reward in advance". You are selling the right to receive good profits if the stocks you own appreciate considerably. In exchange you earn a few pennies which may or may not be sufficient to compensate you for the risk of holding a stock which could go down. This is a losing strategy on stocks which will appreciate, and on garbage stocks it will only lessen your losses slightly.

Sure, you could do the maths and sell a bunch of options, but there is no such thing as guaranteed to make you more money. I think you are wrong, your strategy is flawed, and you don't have much of a clue. This isn't a crime as we were all born ignorant, but it is folly to risk your hard earned until you do know. You've just fallen for some marketing. Remember that everyone is out to seperate you from your money. Would you consider selling naked puts to be a good strategy?


Hi there

When doing options you need a DIFFERENT mindset.

For example today at around 17.30 U.K time You could have SOLD a PUT contract on PCX Expiry on 24 June Strike at 19.00 USD for 0.39 USD so a profit of 39 USD per contract (US market -- I don't bother with european markets). That IMMEDIATELY shoves 20 * 100 * 39 USD into your account -- without even having to buy the shares -- so 780 USD.

A few hours later the option for this had DROPPED to 0.07 USD per contract

So to CLOSE your position you BUY BACK the option at strike USD 19 cost 0.07.

So for this you PAY 7 USD per contact -- 140 USD for 20 contracts.

So net profit with 2 mouse clicks AND NO MONEY DOWN is 780 - 140 = 640 USD which is immediately available in your trading account. No MONEY DOWN either.
So you've got on the whole trade a profit of 32 USD per contract

(39 - 7 = 32 ) We've ignored dealing costs but these are usually only between 8 and 18 USD so for a decent nr of contracts you can ignore for calculating approx gain and profit (or hopefully you don't have any -- loss).

But for say 20 contracts you've made a nice 640 USD profit WITH NO MONEY DOWN just with two mouse clicks.

I've been at the receiving end of a lot of vitriol on options since I made a statement that since 80 % of people BUYING options LOSE -- therefore the it MUST be true that 80 % of people SELLING options must WIN.

However it's a relatively EASY way of making money if you just go for gradual top ups of your capital rather than the "Mega Gain" stuff which usually doesn't work.

Of course you need to pick relatively stable shares -- but also don't think of absolute profit -- just look at the % gain -- remember that even a 0.5 % gain OVER ONE WEEK is compounded around 27% a year.

Most investment brokers would give their eye teeth to gain even 5% a year in the current market conditions.

DO please look at WEEKLY options "The weeklys" from the CBOE --

For OPTION SELLERS Time delay is YOUR FRIEND and a lot of trading possibilities present themselves on the THURSDAY and the expiration FRIDAY -- "Weeklys" expiry every Friday but you can trade the following weeks options on the Thursday night and a lot of activity happens at this time too. But as today's trade shows it always pays to keep an eye on the weeklys.

Remember that "Naked puts" can only lose you in the worst scenario the cost of your strike price (the cost the shares are "Put to You" - the premium you received for selling the put) * the nr of contracts -- and if you pick a reasonable share this won't normally be a problem.

Naked calls are totally different -- you sell a CALL option at say 19 USD a share --- the share rises to 5000 USD a share - well you have to supply shares you don''t have at 5000 USD -- you might have got a premium of say 0.30 USD a share -- so you are still out of pocket BIG TIME. -- Will see you on the Streets of London selling "The Big Issue".

If the shares are PUT to you then you can of course sell a CALL against these -- but another strategy is if you think you will be "PUT" is to do a "Rollover" -- buy back your position to close and then sell another put / call for another expiration -- the following week for example. OptionsXpress and some other online brokers only charge this as ONE trade.

Cheers
jimbo
 
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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?
 
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?

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.

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.
 
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
 
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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