Covered Calls

[Goldmansucks]

I have a lump sum to invest but do not want to play the FX markets with it. I have thought about buying stocks and writing covered calls for income.

I know very little about options but have my own EA's developed for trend recognition and they work quite well on stocks.

Is there anybody who writes covered calls regularly and knows this aspect of trading?

I would be interested to hear from anyone who may like to team up. I would like to learn about writinmg covered calls in practical way and in exchange I would share some of my own knowledge/EA, or some kind of arrangement to suit us both.

 

[daveyc]

hi goldmansucks, (nice name haha)

as i mentioned in the 'is consistent income possible', selling calls against stocks is the exact same risk as selling puts. please don't believe the seminar sellers out there (compound stock earnings among others). there are far better income strategies out there and you probably wouldn't want to trade options in any way before you learned much more anyways.

covered calls require the purchase of stocks and the selling of a call option, thats a lot of $ to lay out. selling puts is the far better way to go. only in certain market conditions. i don't think you will find many covered call sellers out there that can tell you that they are consistently making money month after month and if you do, hold on to your wallet. Basically what ever you heard about 'covered calls' is not accurate and misleading and the way this is sold as a conservative strategy gets a lot of new people involved in options that would not make the leap otherwise. this is how i got into options and learned the hard way.

hope that helps and good luck.

dave c

 

[Goldmansucks]

Thanks for your reply. I will certainly take a more detailed look now before I make the jump.

I have the optionetics course at home but it just seems lot to take in without any chance of applying it practically.

 

[mscanlin]

Is there anybody who writes covered calls regularly and knows this aspect of trading?

There are a lot of good, free tutorials available on the strategy. I like these:

http://www.investopedia.com/articles/optioninvestor/08/covered-call.asp
http://www.cboe.com/Strategies/EquityOptions/CoveredCalls/part1.aspx

 

[Kunal of HSM]

I don't like straight covered calls - the way they teach you in the books.

But you knew this, Goldmansucks, becuase you've been to my thread

If you own stock, look at a strategy called a call vertical. You sell a call (like a covered call), but you buy a call a strike (or more) above the call you sold. This is to floor your lost gains, remember, when you sell a covered call, any profits above the strike of the call you sold goes to someone else.

The only thing is that you also take in less premium, if you had to buy the call at a higher strike.

But this has been working brilliantly over the last 2 months.

The more important factor is what are you going to protect your lump sum investment? covered calls/short call verticals are icing on teh cake, but you gotta make sure you still have cake to eat if things go sour.

Hope this helps.

 

[option7]

I have traded options for 10 yrs now, and in the last 4 yrs have traded mainly covered calls on 15 or so uk stocks. Most of the stocks are the same year after year with usually 5 changing annually. I try to go for defensive high divi stocks or at least growing divi.
I sell the mar,june sept and dec contracts and also sell puts on companies I would like to pick up. Every qtr I set a level for the market and sell an index spread bet below this level to cover myself. I would like to say that I scientifically work out the option value when I trade, but I dont.
I have lost big money on some howlers like not realising a couple of years ago that RBS was now 3000 shares per lot and not checking my statement after trading. The result was me owning 24000 instead of 8000 shares in RBS @600p.I compounded it by not taking my medicine and trying to trade out of it. 100K loss later and I now check these things before trading.
I have made over 10% every year apart from 2008/9 when the RBS trades happened. I run several businesses and as this doesnt take too much time its a good strategy for me. The crucial thing is shorting the index with discipline. I think I have gained by doing this in 75% of cases, although you can get stopped out quite regularly.
I hope this makes some sense.

 

[Pavlik]

CCs can work very well as a bullish strategy, particularly when the market is bouncing off of a major bottom and is in an uptrend. The goal is to do a buy/write, and have the call exercised and the stock called away from you. You hopefully get some upside gain in the stock, and pocket the call premium. I have done well with this strategy over the past year with MMM and NUE, among others.

The key is to do this after a sell-off - that way a further sell-off is less likely, and IV tends to be higher, meaning higher premiums.

Paul

 

[meanreversion]

as i mentioned in the 'is consistent income possible', selling calls against stocks is the exact same risk as selling puts. please don't believe the seminar sellers out there (compound stock earnings among others).

covered calls require the purchase of stocks and the selling of a call option, thats a lot of $ to lay out. selling puts is the far better way to go. only in certain market conditions. i don't think you will find many covered call sellers out there that can tell you that they are consistently making money month after month and if you do, hold on to your wallet.

This is stellar advice, but then how many retail punters bother with "put call parity" before selling options to "earn" some extra income?

buy a call and sell a put with the same strike = long forward position

+ C - P = + F

thus + F - C = - P, exactly as Dave says.

Yet somehow selling naked options is risky, yet covered calls aren't? It's total horsesh1t but options are a subject on which more guff has been written than anything else.

I apologise in that I don't actually have any option strategies to suggest - it's more that Dave's post is one of very few I've seen on t2w about options which actually contains sense!

 

[daveyc]

hello meanreversion,

i'm glad you liked that post! there are so many new people that get into option trading using the 'covered call' strategy (myself included) and unfortunately because they are so new they don't understand the risks involved. Yes, same risk as selling 'puts'. Some people feel like they gotta own shares of stock for some reason when they could just buy a 'deep in the money' long term call and then just sell the front month call against it if someone chooses that strategy as another alternative.

trading options is not easy and not just one strategy is gonna get it done. at the end of an options cycle, for my trades, the risk profile looks like a hodge podge because for me i gotta sleep at night and i do whatever i can to manage the risks and keep my trades in a profitable position and as safe as possible. not easy to do in reality and especially in one way markets and can be especially painful in bear markets.

good luck with your trading and hope its a prosperous new year!

 

[quantuz]

Well my 2 cents:

- If you don't know enough about options, go and learn.
- Covered calls won't make you rich unless you have huge amounts of capital and try to pocket on say 20% per year. Even then covered calls have huge risk involved.

It works this way: People hope and pray the stock will go up simply driven by some academic itiotism that stocks follow lognormal distribution and are pretty much likely to grow slightly over time no matter what happens. Of course this doesn't tell anything about the concept of overbetting, it doesn't tell you that considering a continous time like a discrete time is pure stupidity, it doesn't tell you that with 20% per year it's not much fun, etc, etc.

You can try another strategies like:

- Call back spread, buying strangles, selling puts. Each of which on some occasions. And...don't waste your time looking for arbitrage.

 

[option911]

I would advise anyone who is 'thinking about covered calls' to read the relevant risks associated with options. I always tell people this, would you trust me to trade your money, If I had your knowledge? if the answer is no, then go read.

 

[enni82]

Getting started trading options can feel overwhelming at first. There is a lot to learn and many available resources including books and the internet. If you want a simplified example of a covered call you could start by heading to this post:

http://hubpages.com/hub/Selling-Covered-Calls-for-Additional-Income

Learn all you can and make certain understand the basics of options before you put any of your money at risk!