- Long OTM put or call Credit Spread.
- How far OTM? - Depends on the traders view of the underlying.
Best stocks for covered call?
- Thread starter trendisyourfriend
- Start date
Thanks for the tips taowave. A poor man's covered call is a diagonal spread. Buy one deep ITM call with an expiration date far away (eg Jan 2022). This reduces the effect of theta somewhat. And then sell an OTM call with a closer expiration date for income (eg Oct 2021).
This is basically like a regular covered call but it typically requires much less capital. It's considered a more leveraged position.
FWiW I trade CCs on stocks held within my SIPP (cash account & long-only for the specific purpose of accumulating wealth over a few decades, not day-trading on margin etc)
For that purpose:
I also sometimes dabble with butterflies on synthetic positions in high-vol stocks in a different trading account but it can require a lot of attention with frequent 'white-knuckle' moments, so not recommended to a newbie.
For that purpose:
- as @OptionsOptionsOptions said, for don't let the tail of IV / big premia wag the tail of the underlying. Buy stock that you like, and are happy to hold.
- and as @taowave said look at liquidity/spread. Especially for weeklies as you'll lose out paying a wide spread when you (occasionally but inevitably) need to roll.
- I suggest time your entries too. Don't just sell automatically every week/month/expiry - although There are studies suggesting selling automatically works better but not in my limited experience
- finally, use some of the cash raised to protect yourself from unexpected moves in the underlying.
I also sometimes dabble with butterflies on synthetic positions in high-vol stocks in a different trading account but it can require a lot of attention with frequent 'white-knuckle' moments, so not recommended to a newbie.
I frequently trade the poor man's covered call. However, I'm trading an actual covered call strategy on Robinhood (HOOD). I got 100 shares at IPO and frankly I only wanted about 10! And I have to hold them for 30 days. But, the day they started listing options on HOOD, the WSB crowd stepped in and started buying OTM calls, and the share price doubled. So I started selling those calls. It was crazy - I could sell calls that were $5 or more OTM, and they were listed as 55-60 delta, and brought in like a 15% (of the share price) premium. The share price has steadily declined from its peak of $70, and it within spitting distance of the IPO price ($38), but I've collected about $2,600 in premium on my $3,800! My cost basis is about $12/share now. P&L below - the covered call selling keeps me about even, while the share price steadily declines.
This was a fun example of a big winner with covered calls. Frankly, however, I have my doubts about covered calls in general, though it is a simple way to manage net delta in a portfolio, especially one where you don't want to sell shares to rebalance for tax (or other) reasons.
In this case, I'm now selling ITM covered calls to achieve a net delta on HOOD of about 30.
This was a fun example of a big winner with covered calls. Frankly, however, I have my doubts about covered calls in general, though it is a simple way to manage net delta in a portfolio, especially one where you don't want to sell shares to rebalance for tax (or other) reasons.
In this case, I'm now selling ITM covered calls to achieve a net delta on HOOD of about 30.
My biggest complaint on covered calls is that they don't behave well for large, abrupt moves in share price, either up or down. If the stock moves smoothly in either direction, the CC behaves pretty well.
Here's a few poor man's covered call examples that I've traded recently. The orange curve is the price of the LEAP option (the long leg of the PMCC). My LEAP was typically 90-180 DTE, 80+ delta, while my short calls were typically 10-20 DTE, 30 delta. I rolled the short calls out when their value fell by > 50% or if the value more than doubled.
DISH (Dish Network). Huge, quick upside move. I was able to capture about half that upside. Then there was a quick move to the downside. The PMCC didn't cushion me at all.
INTC. Large upside move before Q1 2021 earnings, which I failed to capture. After earnings, INTC made a huge move down, and I essentially took max loss. PMCC failed as a hedge. You can see how I was slowly digging out of the hole from May to July, but still -40% on the LEAP. (The PMCC has a lot of leverage!)
TLT. This one worked pretty well, since the movements of the share price were less abrupt. The PMCC cushioned the moves down. In exchange, it gives up some of the upside.
I am still using the PMCC, but I've given up on individual shares. Broad ETFs tend to have less risk of abrupt moves up or down. I mainly use the PMCC as a delta management tool. I will use RSI at trade entry to tweak the delta of the short calls, but default is to sell ATM calls.
Anyway, I hope some concrete examples are of use to the OP. Critical feedback invited.
Here's a few poor man's covered call examples that I've traded recently. The orange curve is the price of the LEAP option (the long leg of the PMCC). My LEAP was typically 90-180 DTE, 80+ delta, while my short calls were typically 10-20 DTE, 30 delta. I rolled the short calls out when their value fell by > 50% or if the value more than doubled.
DISH (Dish Network). Huge, quick upside move. I was able to capture about half that upside. Then there was a quick move to the downside. The PMCC didn't cushion me at all.
INTC. Large upside move before Q1 2021 earnings, which I failed to capture. After earnings, INTC made a huge move down, and I essentially took max loss. PMCC failed as a hedge. You can see how I was slowly digging out of the hole from May to July, but still -40% on the LEAP. (The PMCC has a lot of leverage!)
TLT. This one worked pretty well, since the movements of the share price were less abrupt. The PMCC cushioned the moves down. In exchange, it gives up some of the upside.
I am still using the PMCC, but I've given up on individual shares. Broad ETFs tend to have less risk of abrupt moves up or down. I mainly use the PMCC as a delta management tool. I will use RSI at trade entry to tweak the delta of the short calls, but default is to sell ATM calls.
Anyway, I hope some concrete examples are of use to the OP. Critical feedback invited.
The problem I've having with PMCCs is that leaps have very wide spreads. I was looking at the Jan 20 2023 165 LEAP the other day for NVDA and the bid was 40.60 and the offer was 45.50.
Is this too wide? I plan to sell the LEAP (STC) once the short call expires.
Is this too wide? I plan to sell the LEAP (STC) once the short call expires.
The bid/ask spread can be miserable on LEAPs, even for fairly liquid underlying securities. The situation gets worse when you try to roll the LEAP if the stock rises (pushing the delta of the LEAP close to 1.0). I've even had trouble selling my SPY LEAPs, and SPY is the deepest options market on the planet! This is the biggest downside of the PMCC, I feel. I really try to minimize the number of times I have to buy a LEAP or roll it. I will typically buy LEAPs with 5-6 months to expiration and roll them with 2 months to expiration.
I guess you can just gauge the REAL value of the LEAP yourself, and put in a good-till-cancelled order, hoping that a sane seller comes along. I have found that an 0.8 delta LEAP should have about 15% extrinsic value. In other words, if an 80 delta LEAP is $10 in the money, I would expect to pay $11.50 for it.
I'm positive that there are people whose sole trading model is making a market in these illiquid options. There's a definite market inefficiency to be exploited.
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Why use leaps?
Trade a vertical spread in the same month.
NVDA:
Oct. 2021 ... 190C ... $38 ($3,800) ... $1 spread
Premium $1.70 (3.5 cents per day)
Jan. 2023 ... 165C ... $77.2 ($7,720) ... $7 spread
Premium $16 (3.1 cents per day)
***Monthly have better spreads ... $1 vs. $7
***Total investment is smaller ... $3,800 vs. $7,720
***Time decay is similar.
I'm going to list 30 companies I have done covered calls (mostly leaps) on. To go into detail would take too long...So I'll just list them and you can do the research OK.
In no special order...FAGO, CVS, COP, CHH, SYY, MLR, IBM, AAPL, KO (a gem to option for income now), TMUS, EWA, RING, BOTZ, GOOD, HPQ, ZION, BG, CVX, PFE, EWY, DUK, HIG, MCD, GILD, BABA, EMB, VZ (be careful with this one...A ton of employees and unions), TEVA, SLV, HRL, ADM.
In no special order...FAGO, CVS, COP, CHH, SYY, MLR, IBM, AAPL, KO (a gem to option for income now), TMUS, EWA, RING, BOTZ, GOOD, HPQ, ZION, BG, CVX, PFE, EWY, DUK, HIG, MCD, GILD, BABA, EMB, VZ (be careful with this one...A ton of employees and unions), TEVA, SLV, HRL, ADM.
Whatever you pick trendisyourfriend, pick something that you will like to sit on for the long run. Markets are at all time highs.. any down move and it wont take long for the covered call strategy to not look all so wonderful. Only do it in moderation and on underlyings you can comfortably hold in case this is the top for the next few years.
Personally i just stick with etfs. Even those, most of them are at valuations that are hard to justify.
Hth!