Advice on best possible covered calls (Interesting position)

T

thompson182

Hi all!

Looked up a lot of Elitetrader posts in the past but have never posted anything.

My question is this-

I've been given access to a family account that has a large retirement IRA (well, large to me) and is basically a passively managed account. They are in several major equity ETF's and a few bond ETF's. They have no intention to sell these positions. With that being said, I've been given a green light to write covered calls as long as their stocks don't get called. What would be the most profitable method of doing this?

Off the top of my head I thought writing ATM covered calls would be the most profitable. If the stock closes below I absorb the entire option premium. If it goes up I can simply continue to roll up and out. It's all ETF's so no worries about earnings announcements etc. Thoughts?
 
Selling covered calls can reduce cost basis of the ETF positions, however, the probabilities of shares being called away are real.

Trading options, regardless of covered or not, is an exercise in applied probabilities and volatility trading, whether you're aware or not.

Don't let my post scare you into not selling covered calls, but learn to appreciate the nature of the options beyond their contractual obligations and you might find yourself in a better position to manage your family's account.

Good fortune, my friend.
 
thompson182 said:
I've been given a green light to write covered calls as long as their stocks don't get called.
More...

Seriously that's what you'r gonna go with? Doth that not come with thy territory?

I suppose you could hedge out that call risk by buying some higher calls? Then hedge out that expense by selling some OTM puts... Oh lordy, by the time you'r done that's gonna be one ugly 25-headed monster requiring paying commissions and crossing bid/ask spreads and paying premiums like nobody's business.

If you'r lucky you'll end up w/ a profile that has no possibility of a profit but guaranteed losses, just short Virtue Financial to achieve the same result w/o so much effort.
 
thompson182:
Typically, the type of ETFs you mention will also exhibit low implied volatility, which will likely keep the CALL premium low, so you will be picking up pennies in front of bulldozers, so to speak. If you are writing your calls closer to ATM, you need to insure you address Dividends, as you may get some undue excitement, if you have not worked thru how you will handle it. Sometimes it may be interesting to time the writing if the Calls when you think you are about to bounce off overhead resistance, so if you are correct, you may be able to close the position early (as the price pulls back), and allow you feed more than once per Expiration. (If others also think it will bounce back, the premium will be relatively small, however)
 
The options market is quite efficient, so essentially if you sell options with a low probability of being called away, the premiums will also be very low and likely not worth selling because it won't even cover transaction costs. If you sell options with high premium, there is a high probability of being called away. However they are both essentially the same thing.

Assuming you are willing to "cash settle" anytime the positions go against you, since the options market is efficient there is no difference between which strikes you sell. The only consideration should be transaction costs, and from that perspective you'd be better off going a little closer to the money.

So maybe 2-3 months out, and 5% OTM would be a nice balance? Just remember, it's a matter of probability. This strategy ONLY works if you stick to it over a high number of occurrences. Most months will be uneventful and you'll get your small profit, but there will be times when you get hit, and occasionally hit very hard. As long as you TRULY are prepared to cash settle those bad months, then it's a fine strategy that will work itself out in the long-run.

However most investors don't have the psychology to stick to the system. When things go hard against them, they will likely do stupid things trying to weasle out of cash settling, maybe opening up new positions and making things worse.

Great a system from day 1, and go with it.
 
how old are u? r u quite young that ur family doesn't trust u?

by telling u "as long as their stocks don't get called away" is basically putting u in handcuffs. u need to operate freely.

what u need to do is ask ur family why they need to put this restriction in place?

u said this was an IRA acct. so there isn't any tax considerations or cost basis to affect here.
meaning if the stocks were called away, it would be frictionless to ur family. u could turn around and re-acquire them and there would be no change in their tax status.

unlike with a taxable acct, where if they acquired it long ago, they might have a low cost basis or a long term vs short term capital gain tax event.

explain to them, those dont come into play for an IRA.
 
GoldmanSax said:
ur family ... is basically putting u in handcuffs. u need to operate freely.
More...

...And after that... that's when things really went South, I mean tits up in a hurry....

download (5).jpg


.... Proper f@cked!

Don_t_panic.jpg
 
Check out https://www.cboe.com/micro/buywrite/.

Note: BXY, The 2% OTM has lagged the SPY. Has lagged since 2013. The market has been a runaway train.

There's not much money to be made selling past 2% OTM and you're activities can still make the portfolio lag the index.

Before you do it for family, do it for yourself first.
 
xandman said:
Check out https://www.cboe.com/micro/buywrite/.

Note: BXY, The 2% OTM has lagged the SPY. Has lagged since 2013. The market has been a runaway train.

There's not much money to be made selling past 2% OTM and you're activities can still make the portfolio lag the index.

Before you do it for family, do it for yourself first.
More...

I found this website and thought you might enjoy it: http://www.cookyourpet.com/frames_intro.htm
(I apologize in advance for offending you)

OMG sorry I just had to share that little random WTF jewel, how much do you think the author hated these people:

http://www.cookyourpet.com/frames_intro.htm
 
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