Advice on Covered Calls

[jo0477]

I'm looking for some advice on how best to start developing a model for writing covered calls. I have trimmed my holdings down in my registered portfolio and am looking for guidance on where to start modelling a good stock and covered call program since outrights and covered calls are all that is available to me.

I work in ALM so I do have access to Bloomberg terminal (if that is any benefit). I don't have a lot in this account (~ 10k) as it was a pension transfer from a job I left years ago so I thought it might be a good opportunity to experiment.

By the way, I was a big fan of Atticus' "ship it" journal and I still try to keep up with the "single name delta book". Seems like a lot of quality information in the options forums here, so I figured I'd see what you guys have to say.

Thanks in advance

 

[cdcaveman]

your selling upside distribution... thats a tough call if you ask me.. because why hold a stock if you think there is no upside... i mean sell upside distro against dividend baring stocks.. if there is even much premium there.. ... remember covered calls and short puts are =
if your restricted in a retirement account.. i'd become more of a investor in single names when macro winds drag the good names down..

covered calls has buried risk.. how do you put s stop loss on your stock? you can exit your stock and leave the call naked.. you obligate yourself to tons of downside by selling your upside.. I DON'T LIKE IT..

 

[jo0477]

Quote from cdcaveman:

your selling upside distribution... thats a tough call if you ask me.. because why hold a stock if you think there is no upside... i mean sell upside distro against dividend baring stocks.. if there is even much premium there.. ... remember covered calls and short puts are =
if your restricted in a retirement account.. i'd become more of a investor in single names when macro winds drag the good names down..

covered calls has buried risk.. how do you put s stop loss on your stock? you can exit your stock and leave the call naked.. you obligate yourself to tons of downside by selling your upside.. I DON'T LIKE IT..

Thanks caveman,

is there no situation where holding an issue with the intent of selling upside is advisable? In a nutshell, I grew this account from a couple k buying some stock but mostly outright directionals based on some pretty simplistic macro research and relative vol comparisons. I don't give myself too much credit though, I'm going to assume that most of that goes to a steady bull the past few years. I agree with your owning quality single names but I would like to know when generating some prem on these issues makes sense and how you would determine when/if you would like it?

 

[traderlux]

my thinking about cc is similar to the caveman.

you might want to think about the WOF, wheel-of-fortune.
you start with a np, then if assigned, you sell calls with the goal to get called out and start with the np again. the idea is to cycle-in the income without wanting to hold the underlyings.

if you want to do cc on stocks you want to own, $10k account is on the small side. some say even with $25k you should consider cc on ETFs and not take on individual stock risks.

Quote from jo0477:

I'm looking for some advice on how best to start developing a model for writing covered calls. I have trimmed my holdings down in my registered portfolio and am looking for guidance on where to start modelling a good stock and covered call program since outrights and covered calls are all that is available to me.

I work in ALM so I do have access to Bloomberg terminal (if that is any benefit). I don't have a lot in this account (~ 10k) as it was a pension transfer from a job I left years ago so I thought it might be a good opportunity to experiment.

By the way, I was a big fan of Atticus' "ship it" journal and I still try to keep up with the "single name delta book". Seems like a lot of quality information in the options forums here, so I figured I'd see what you guys have to say.

Thanks in advance

 

[jo0477]

Quote from traderlux:

my thinking about cc is similar to the caveman.

you might want to think about the WOF, wheel-of-fortune.
you start with a np, then if assigned, you sell calls with the goal to get called out and start with the np again. the idea is to cycle-in the income without wanting to hold the underlyings.

if you want to do cc on stocks you want to own, $10k account is on the small side. some say even with $25k you should consider cc on ETFs and not take on individual stock risks.

Interesting, thanks a lot. I think this would work well if I am authorized to write cash secured puts in that account. Definitely a lot more flexibility and I wouldn't have to worry about owning the underlying. This would be ideal since my plan was to buy issues best suited to cc's, which would not necessarily be my first choices for long term holds.

So just curious if there is anything tricky to factor into the offsetting short call. I'm assuming you just write deep enough itm to basically ensure you get called away?

 

[barney-]

I typically roll my call to the next expiration once it has lost 85% of its value (aka you're up 85% as the seller). I try not to close them out, as a retail investor premiums eat you alive.

Everyone has their rule-of-thumbs. I lever up and usually try to trade 2 lots of CC on AAPL a month. Pays the rent.

You never have to 'offset' really. If stock goes past your strike, you can just let it get called away and walk away with your gains. The beauty/downfall of CCs is the ability to calculate your MAX gain upon entering a trade, which is simply ((Strike - Cost Basis of Stock + Option Premium) * Shares). This is assuming you are selling OTM.

Sometimes i'll sell an ITM CC to juice my return when I want to get out of a stock.

 

[filthy]

covered calls are deceptive. they look like a directional play but they are really a distributional play. they are basically a one time hedged option and as such are the most extreme volatility play possible but a volatility play nonetheless.

so the question you need to ask is "is implied vol expensive?" There are certainly times when this is true of volatility in stocks. But it isn't generally true. If you want a recipe book approach you are better off selling calls on broad indices where implied vol is usually rich.

 

[cdcaveman]

Quote from filthy:

covered calls are deceptive. they look like a directional play but they are really a distributional play. they are basically a one time hedged option and as such are the most extreme volatility play possible but a volatility play nonetheless.

so the question you need to ask is "is implied vol expensive?" There are certainly times when this is true of volatility in stocks. But it isn't generally true. If you want a recipe book approach you are better off selling calls on broad indices where implied vol is usually rich.

i've thought about this at times.. selling calls as a proxy for selling volatility.. its soooo like werid because short vol = long equities in general.. and most typically selling vol leans more naturally towards selling puts.. because equities go down vol goes up.. "typically" ... it just seems like a distro play like you first said.. but i just don't get the deal because if your selling rich call premium against stock your most likely in a high vol environment and it just seems so natural to sell the most expensive part of the distribution.. "puts" its quite different in ags but whatever i'm just thinking outloud.. i just couldn't see putting to much of my research towards pseudo vol selling in calls and lose focus on the actual stock picking a retirement fund..

 

[jo0477]

Quote from cdcaveman:

i've thought about this at times.. selling calls as a proxy for selling volatility.. its soooo like werid because short vol = long equities in general.. and most typically selling vol leans more naturally towards selling puts.. because equities go down vol goes up.. "typically" ... it just seems like a distro play like you first said.. but i just don't get the deal because if your selling rich call premium against stock your most likely in a high vol environment and it just seems so natural to sell the most expensive part of the distribution.. "puts" its quite different in ags but whatever i'm just thinking outloud.. i just couldn't see putting to much of my research towards pseudo vol selling in calls and lose focus on the actual stock picking a retirement fund..

Funny, I was just reading these responses (thanks again to everyone) and was about to ask something along these lines. Selling the np and then writing the itm calls to avoid owning the underlying would have been ideal (sadly, not even cash secured puts allowed in registered accounts). Selling calls in a grinding, low vol market seems sort of counter intuitive for the risk assumed. This is one of the reasons I was asking about how people might select an underlying (or just avoid this strat altogether).

So I guess my question is what is the ideal environment for cc's? My understanding is that the idea is to write them just to pad returns during the quieter periods then switch to another strat when vol picks up? (I could be way off here) Problem with being limited to cc's is that all the spreads I would like to consider are a no go...

And just an FYI, this is a registered account but not my primary retirement fund or anything. I have a DB plan at my current job so I don't have to be overly cautious here. Just so happened that over a few years, this account grew to a size where its a little beyond the having fun stage (for me anyway!). Figured if I could start growing it at a regular clip now, it could end up being a nice supplement down the road.

 

[cdcaveman]

Quote from jo0477:

Funny, I was just reading these responses (thanks again to everyone) and was about to ask something along these lines. Selling the np and then writing the itm calls to avoid owning the underlying would have been ideal (sadly, not even cash secured puts allowed in registered accounts). Selling calls in a grinding, low vol market seems sort of counter intuitive for the risk assumed. This is one of the reasons I was asking about how people might select an underlying (or just avoid this strat altogether).

So I guess my question is what is the ideal environment for cc's? My understanding is that the idea is to write them just to pad returns during the quieter periods then switch to another strat when vol picks up? (I could be way off here) Problem with being limited to cc's is that all the spreads I would like to consider are a no go...

And just an FYI, this is a registered account but not my primary retirement fund or anything. I have a DB plan at my current job so I don't have to be overly cautious here. Just so happened that over a few years, this account grew to a size where its a little beyond the having fun stage (for me anyway!). Figured if I could start growing it at a regular clip now, it could end up being a nice supplement down the road.

i wish i knew how to get creative in an account with such restrictions.. its kind of werid to me to think that customers quickly get lead into thinking CCs are less risky.. i thought the same thing.. just because its "covered" when selling a put has the exact same risk profile except you are trading 1 contract and your typically selling closer to the actual volatility instead of one side of the distribution..