is covered call riskless?

[luofeiyu]

it's said that covered call is risk-less.
a freind of mine tell me it's not ,there is risk in the covered call.
let's suppose:i have 100100 usd ,i bought 100000 shares A stock,1 usd per share, pay 50 usd commission,then i write covered call,1000 contracts , strike price is 2 usd ,the call option is 0.05,i pay commssion 50 usd too.
now ,in my account ,there is 100000 shares of A stock ,1000 contracts,there is no cash in my account .
when the stock go up to 4 usd per share , and if the option go up to 10 usd ,what will happen??

a friend tell me ,excess liquidity will <0 ,you will be sold some of your stock or option ,to make excess liquidity >0,because the rule in many brokers is:
Equity with Loan Value 400000
Cash Value 0
Stock and Bond Value 400000
Span Option Value 0

Net Liquidation Value 400000
Non Span Option Value -100000
Reg T Equity with Loan Value 390000
Initial Margin Requirement 400000
Available Funds 0
Maintenance Margin Requirement 400000
Excess Liquidity -10000

in this case ,brokers will sell some of your stocks or options to make excess liquitity >0

if this is truth, the covered call is un--riskless!!

is that true??

 

[Rhody Trader]

A covered-call is NOT riskless. If the market falls by more than what you receive in premium from selling the calls then you will lose money. For example, you buy XYZ at 100 and sell a 100 strike price call for 2. If XYZ falls to 95 then you're down 3 (100-95+2).

 

[trader3cnd]

IMO the farther OTM you sell the less the risk but not riskless.

 

[Rhody Trader]

IMO the farther OTM you sell the less the risk but not riskless.

Actually, the farther ITM. Farther OTM options produce lower premium income, thus less protection for the long stock position. Farther ITM produce more premium, thus more loss protection. Of course the latter also have increased risk of the stock being called away.

 

[bicksmith]

Hello, when it comes to riskiness there is some risk involve in options but there are some options, which are of merchandise and other types companies like P&G etc which minimum those risk . Bank De Binary provides option of more than 90 stable companies so if you are interested in investing you will find Banc De Binary a very suitable place to invest in.

 

[Timetraveller]

Riskless?

If it were riskless everyone would be doing it and there would be no profit margin [ assuming it were riskless which it isn't...]

Can you lose money on it?

Yes if the stock price plummets you will which is risky. Or if the stock price sky rockets which will get you bad for your short contracts...

Tread with caution...

 

[daveyc]

trust your friend. ofcourse there is risk! don't be fooled by the weekend seminar sellers who tout this as free money for everyone. compare this strategy to selling puts and ask yourself if there is risk in selling puts naked. if you cannot understand that these strategies have the same risk profile and that selling puts make more sense and are more cost effective then you should consider whether or not you are ready to be trading options. i hate those weekend seminar sellers who trick new traders into this and when they lose big (and they will) they wonder what the heck just happened and why they got into this business and cannot retire after all.

 

[neil]

Re: is covered call riskless? - is it F--k

riskless
The market is littered with quants who thought maths rule the markets - until the Black Swan bit their bums:whistling

 

[Enjoy The Markets]

A covered-call is NOT riskless. If the market falls by more than what you receive in premium from selling the calls then you will lose money.

of course there is risk! don't be fooled by the weekend seminar sellers who tout this as free money for everyone. compare this strategy to selling puts and ask yourself if there is risk in selling puts naked. if you cannot understand that these strategies have the same risk profile and that selling puts make more sense and are more cost effective then you should consider whether or not you are ready to be trading options.

Excellent responses. In an attempt to state it even more clearly: the risk is the stock falling. There is no added risk when selling calls* on stock you already own, which is what seems to get most people excited. They are strangely comfortable owning lots of stock so when they hear they can write calls and make extra money on an "investment" they already own they become overwhelmed with excitement. This is what the seminar guys prey on.

* depending on how you define risk ... when selling these calls you are limiting your profit potential, so there is the risk that you will miss out on a big stock move.

 

[toomuch]

Covered Calls are hailed as the holy grail but they are a losing strategy long term. It's because the risk/reward is so ass-backward. Small possible returns with large downside risks.

 

[toomuch]

If you try covered calls, you will find you make six trades, make a little money on 5 and give it all back and more on the last one where the underlying stock drops 30% on you. Much better option strategies out there

 

[toomuch]

In my opinion, Diagonal spreads are much better than CC's. Basically the same trade with less margin and risk. When it moves against you, it's easy to hedge with a little short stock. Nice strategy

 

[Clynelish]

Hi,
maybe the discussion is over by now (it's 08.march), but this Covered Call is a strategy (ITM and OTM) I use and I think it is interesting because you can chose from a few stocks that have liquidity for options and make your risk-return analysis and choice. So far I've been doing it just in the Brazilian Stock Market, and sometimes I can get an ITM trade where the stock can fall almost 10% but I still will close the position (sell the stocks) and get more than 1% gross return rate. I guess this rate is much higher than the one you could get in U.K., probably because interest rate in Brazil is much higher than in U.K. ...

 

[Splitlink]

I think that it is you who have to decide whether it is riskless, or not. If you get exercised you will have to accept the price of the option exercise price and deliver the shares.

If you are asking whther the chances are slight that you will be exercised, or not, they do say that most options expire worthless, I believe. I would not bank on that, though. The trick is to make money on the time wastage and write options at a price that will give you a profit on the sale, even if things go wrong. 1% bank interest would not incite me to write options, I'm afraid.

 

[Clynelish]

Hi,
I forgot to say I use to get this 'more than 1% gross rate' in 4 weeks.
So, it would be more than 12% in a year, with low risk (compared to buy&hold, but if the market goes bullish I still just make the 1.sth%).
obs:
RiskLESS... I always have a doubt with this english expression, because LESS means not as many as in some other situation, so it would be a matter of grade/level. However, I think all the expresisons in English that end with LESS mean zero of sth. So, if riskless means zero risk, certainly doesn't apply to covered calls.

 

[Splitlink]

Hi,
I forgot to say I use to get this 'more than 1% gross rate' in 4 weeks.
So, it would be more than 12% in a year, with low risk (compared to buy&hold, but if the market goes bullish I still just make the 1.sth%).
obs:
RiskLESS... I always have a doubt with this english expression, because LESS means not as many as in some other situation, so it would be a matter of grade/level. However, I think all the expresisons in English that end with LESS mean zero of sth. So, if riskless means zero risk, certainly doesn't apply to covered calls.

Ah! It's a matter of language. Riskless means no risk. It is all a matter of pencil, paper and what your commonsense tells you.

If you have the shares, you don't want to sell them but you think that they are a bit toppy and could come back in the short term, you can write them at a price that, if exercised, will allow you to sell them at a profit, retain the option money and interest. If you do that, your risk will be that the price may have gone up and you would have made more by selling them and not writing the options. In that case, you will have lost nothing, but made less. It's something like insurance. Just make sure that you did not borrow the shares for cover, otherwise you may be obliged to buy them back, again.

I traded options more than a decade ago. I don't do it, now, and I expect that there is much that is new and I do not know,

 

[lamog7]

If you try covered calls, you will find you make six trades, make a little money on 5 and give it all back and more on the last one where the underlying stock drops 30% on you. Much better option strategies out there

Why wait for the stock to drop 30%?

 

[Splitlink]

Why wait for the stock to drop 30%?

Yes, you are right. As soon as the price weakens, even a little bit, it will affect the option price enormously, especially if they are out of, or near the money options. Writing options is always more profitable than buying but they must be covered. The famous Socrates, of a few years ago, tried to convince readers that trading uncovered was the way to go but, although he made sure to tell us of the money he made, he failed to convince.

 

[daveyc]

My advice for covered call sellers. Try to come up with a better trade idea! Look at what your losses will be because you know stocks can tank and volatility can really spike. Stress test your 'safe' covered call trades, add time and volatility to the equation. You know that stocks can open with huge gaps down, all stocks, they are just stocks. I guess a lot of guys are brainwashed on the fantasy of free money but its no wonder, all I see/hear on the internet and radio is how great this strategy is and one after another client is giddy with how much money they are making. Don't buy that marketing hype and outright lies from these people that should be in wearing striped shirts with #'s.

If you feel you must own stocks, buy far out puts for protection that are slightly 'in the money', then sell the front month calls and you could be then in a risk free trade after a few months. Would you rather risk the entire stock investment or a few hundred dollars? This could be as safe as it can get in the option trading world. Try to put that thought on paper and make it happen.

Next time someone asks you about covered calls and asks you to join them in a $3000 seminar, tell them to put it on a risk graph and then tell you what the risks are with volatility and time changes. Save your time and portfolio, do the work yourself and be honest with yourself.

 

[Splitlink]

My advice for covered call sellers. Try to come up with a better trade idea! Look at what your losses will be because you know stocks can tank and volatility can really spike. Stress test your 'safe' covered call trades, add time and volatility to the equation. You know that stocks can open with huge gaps down, all stocks, they are just stocks. I guess a lot of guys are brainwashed on the fantasy of free money but its no wonder, all I see/hear on the internet and radio is how great this strategy is and one after another client is giddy with how much money they are making. Don't buy that marketing hype and outright lies from these people that should be in wearing striped shirts with #'s.

If you feel you must own stocks, buy far out puts for protection that are slightly 'in the money', then sell the front month calls and you could be then in a risk free trade after a few months. Would you rather risk the entire stock investment or a few hundred dollars? This could be as safe as it can get in the option trading world. Try to put that thought on paper and make it happen.

Next time someone asks you about covered calls and asks you to join them in a $3000 seminar, tell them to put it on a risk graph and then tell you what the risks are with volatility and time changes. Save your time and portfolio, do the work yourself and be honest with yourself.

Yes, you are right, too! I've forgotten a lot. If they go lower than the exercise price they, obviously, won't be exercised because they can be bought cheaper in the market. Since you have to hold the shares until then you would have to buy the options back before you sold the shares. So there is a risk, there, if you are too slow. It's work for professionals. I left that and went to straight share trading--I sleep better at night.