Option charges

osho67

Well-known member
407 3
Yesterday for the first time I did a covered call option on IB. Will you believe these charges. To buy 100 stock it cost $1 and no stamp duty. To sell one option it again cost $1 as compared to £22.5 plus contract fee of £1.8 with a uk stockbroker.

Because of the low charges the return will be about 14%

This is not a recommendation to sell options. Just to highlight the charges in UK. And the option spread was very narrow as well.
 

JonnyT

Senior member
2,560 22
You may make a negative return. What you are saying is that your maximum return is 14%.

Most covered call writers lose out long term.

JonnyT
 

osho67

Well-known member
407 3
Dear Jonny

Yes I agree this is a potential outcome. I try to select very low volatility shares Over the last 10 years I have lost out only on one share which was Polypeck.

Premium received on covered call is classified as capital gain and this strategy has helped me to use my CGT allowances.

Please suggest if you have some other way . Thanks for your valuable comment
 

JonnyT

Senior member
2,560 22
Ho Osho,

I take it you are trading US Stocks hence no Stamp etc?

Good luck with the strategy, but you still need the underlying not to fall, in fact ideally stay still so you can keep repeating the process. Do any shares actually do this?

JonnyT
 

osho67

Well-known member
407 3
Hi Jonny

Yes I have traded on us stock. Spreads are very low.

But you have made me to think and I am going to look to this possibility when markets open.

What I can do is to sell a put option and buy another put at a lwer price which will result in small net credit. This way I am protected to sell shares at a certain price limiting my losses.

If the share price goes up my original call will be exercised. and my shares will be sold making me another profit equal to the selling price minus the buying price. Selling price is fixed so upside potential is limited.
 

RogerM

Established member
752 6
In my view selling calls against stocks you hold (i.e. a covered call) is actually lower risk than just swing trading the shares on their own. Most people get hung up on what happens if the share price rises above the strike level of the short call. But it's no drama - you have just capped your gain at this level. The risk to capital is that the share price falls, but at least in this case you still get to keep the call premium to offset against the loss made on the shares.

Care to share with us what the trade is osho67?
 

osho67

Well-known member
407 3
Thanks Roger (M0 for your support.The trade was on Microsoft. The expiry is Jan 04 and strike price is $30. The buying price for shares was about $28.5. I received a premium of $125. I have traded only one contract.

Your opinion on another matter would be much appreciated. Will it be good to trade call option on us indices? Please tell me what are the ticker symbols for Dow, S&P and Nasdaq.

In UK the expiry months are 3, 6, and 9 months. I donot understand how it works in US.
Thanks for any comments
 

JonnyT

Senior member
2,560 22
Hi Osho67,

I make that a return of 4.38% assuming you are not taken out and the price doesn't move.

If you are taken out I make it a return just below 10%

Is this correct?

Thanks

JonnyT
 

JonnyT

Senior member
2,560 22
Hi Osho < 10% as you cannot assume that you will be taken out and the process will be repeated 4 times per annum.

JonnyT
 

osho67

Well-known member
407 3
Hi Jonny

I am sorry I donot understand you. I have received the premium which is not refunded. The premium alone is more than 10%

I have bought the shares at $28.5 and I have sold the option at $30. If I am exercised I will make another $1.5 per share i.e.$150. If I am not exercised the shares are mine and I can sell another option in Jan 04. Why cant the process be repeated 4 times a year?
 

Jimbo

Newbie
6 0
Stock selection is important with covered calls as you are normally at risk from a collapse of the stock price.
There are a number of strategies that can be used to minimise the risk.
I have been using IB and there seems to be an interesting difference to brokers that I have used previously.
The written call does not appear to be linked to the stock in the same rigid way that I have been used to.
This means that you can have a stop loss on the stock for protection. Of course if the stop is hit your margin position would change and the call would be naked. But except in extreme cases you would be able to buy back the call for a profit.

I would be interested to hear the views of the experienced options traders on “covered” calls with a stop loss on the stock.
 

osho67

Well-known member
407 3
Hi Jonny

May be I am not good at maths. I have earned $125 on an investment of 2850 for a period ending Jan 04. I roughly take this as 4 months. So 125 divided by 2850 multiplied by 100 gives me 4.38 and to annualise that I take 4.38 divide by 4 and X 12gives me 13.14% per annum.

Please tell me what am i doing wrong.
 

stevet

Established member
917 5
jimbo - writing a covered call really needs to be done at the right time and at the right price - and its a great strategy if u have the experience to then trade in and out of the option in order to lock away little profits to save up for when the occasional stock tanks !

but remember there are lots of people who spend their whole day looking to take a stock to where they know most people have put the stops - which is why stocks tank and then bounce - so its a tricky game to play - but if you are able to trade in and out of options and know the technicals of the stocks - it can be a one way ticket for a nice earner - and i am assuming you mean US stocks and options - i have no experience of European options - but from what i have seen, the odds are against you in Europe
 
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