Best way to pick strike price for covered calls?

[morganpbrown]

I traded the poor man's covered call (substitute 1 long-dated, deep ITM call option for every 100 shares of long stock) extensively for about a year, on multiple securities. I was not pleased with the results (not that I went off the rails). It was a hell of a lot of work to end up a couple points behind where I would've been, had I just bought and held stock...

All the trend following guys say "let your winners run and cut your losses quickly." The CC does the opposite! It is still a bullish strategy, yet every time you sell a covered call, you are cutting your winners short. When the stock enters a downtrend, you chase it down, selling calls along the way. I've been there, and at best, you will break even during these times. Now you're letting your losers run! Better to get stopped out early in the downtrend.

For the record, I was trading a mechanical strategy. Buy 120 DTE 80 delta call, sell 30 DTE 50 delta calls. Roll at 10 DTE or when short call leaves the 35-75 delta range, whichever comes first. I suspect that people who succeed at this strategy are very good at predicting short term direction. If it's going to go up, don't sell a call. If it's going to drop, sell expensive calls. I guess that's a "duh"

 

[newwurldmn]

Yeah, I am making money thank you!! I only write about 10-15% of my stocks to options (covered calls). You do not need to do things like iron condors or butterfly spreads. Yes, I lose out on major upside of stocks. But, many of my options expire out of the money...I'll write another one. Solid cash flow on dividend paying stocks...Not rocket science.

Here is a thread I did about some Apple stock I bought. Hope to net about $5,000. when all is said and done (option money, dividends, profit, 3% return on the option money/dividends compounding). Who do you think sells on the other side of your puts?? Others are out there looking for income...

https://www.elitetrader.com/et/threads/another-boring-covered-call-i-did-yesterday-apple.359340/

has it outperformed a buy and hold on the stocks (on an after tax basis)?

 

[qlai]

I was trading a mechanical strategy.

I’m curious how you came up with this? Was it something that showed good results in back testing?

 

[morganpbrown]

I’m curious how you came up with this? Was it something that showed good results in back testing?

You give me far too much credit. No backtesting, but I should, because I've started using the ORATS API. Love it.

Many of my choices were related to liquidity. A 120 DTE, 75 delta long call is easier to roll than a 500 DTE, 90 delta call...and vastly more capital-efficient. And still I often had problems selling the long call!

My thinking on selling the 50 delta call: if you're selling options, you might as well sell the one with the most extrinsic value. I also typically wasn't comfortable with 50-60 net delta in the position, so the 50 delta short call helped me keep the net delta to 20-30. There may be some other greek reason why 50 delta is a bad choice.

I still like diagonals, but shorter-dated on both legs than the PMCC.

 

[morganpbrown]

I’m curious how you came up with this? Was it something that showed good results in back testing?

And I was trying to trade about 15 securities while working a day job. I was overwhelmed trying to "think" about each exit & entry. That's a lesson unto itself (trade less if you can't fully understand each trade)

 

[Cabin111]

has it outperformed a buy and hold on the stocks (on an after tax basis)?

This may be hard to explain...I have a CPA and use tax planning throughout the year. First, I don't pay taxes 9 out of 10 years (large assets, high medical/dental, low income...Think wheat farmer in Montana). Also many of my and my wife's trades are in Roth IRAs...Have already paid taxes. In Roths, it's straight tax free income. The rare year I do pay taxes, I will glean losses for income tax purposes. Those will be old covered calls that I stopped chasing and sold for tax purposes.

So right now, I would be pleased to get 6-12% annual return year in and out. I am willing to forgo huge returns for a comfortable return even in a bear market. Yeah, I will buy and hold some QQQ...Let it ride through it's ups and downs. My biggest mutual funds (closed ended) are RVT, RMT, RGT. The income generated speaks for themselves. On the 10-15% of the options I write on my stocks, they are usually leaps on very boring stable companies...Apple, ADM, BG, Coke, Exxon.

The dividend and option money is what I am looking for in the leap. Play the time decay and not have to look at it for weeks if necessary. If they get called away, I will wait the 30-31 days and usually buy some more. With other stocks I will swing for the fences. But I also want to generate a steady income over the years...Just me.

 

[treeman]

Because I do not want to pay capital gains taxes until 2023.

Choosing a trading strategy for tax reasons seldom works out. Paying taxes means you made money. Enjoy it. It’s better than the alternative.

 

[newwurldmn]

This may be hard to explain...I have a CPA and use tax planning throughout the year. First, I don't pay taxes 9 out of 10 years (large assets, high medical/dental, low income...Think wheat farmer in Montana). Also many of my and my wife's trades are in Roth IRAs...Have already paid taxes. In Roths, it's straight tax free income. The rare year I do pay taxes, I will glean losses for income tax purposes. Those will be old covered calls that I stopped chasing and sold for tax purposes.

So right now, I would be pleased to get 6-12% annual return year in and out. I am willing to forgo huge returns for a comfortable return even in a bear market. Yeah, I will buy and hold some QQQ...Let it ride through it's ups and downs. My biggest mutual funds (closed ended) are RVT, RMT, RGT. The income generated speaks for themselves. On the 10-15% of the options I write on my stocks, they are usually leaps on very boring stable companies...Apple, ADM, BG, Coke, Exxon.

The dividend and option money is what I am looking for in the leap. Play the time decay and not have to look at it for weeks if necessary. If they get called away, I will wait the 30-31 days and usually buy some more. With other stocks I will swing for the fences. But I also want to generate a steady income over the years...Just me.

On those stocks you overwrite on, would you have done better if you just owned them instead of capping your upside? I can’t imagine you did better on apple. Frankly all the money you left on the table with apple probably offset all the premium
You got on the other stocks.

 

[Cabin111]

On those stocks you overwrite on, would you have done better if you just owned them instead of capping your upside? I can’t imagine you did better on apple. Frankly all the money you left on the table with apple probably offset all the premium
You got on the other stocks.

hindsight is always 20/20. What if we hit a major recession and Apple's stock stayed between $80-$100 for four or five years? I will still be gleaning the dividend and option money. You have to look past a major bull market, to things like a long lasting bear market.

About 15 years ago I was working for a company. My younger manager was buy a house...Market had gone up for years and years. I asked him what would he do if the price of the house drops? He stared at me for a second and said..."houses can go down in price"???

 

[newwurldmn]

hindsight is always 20/20. What if we hit a major recession and Apple's stock stayed between $80-$100 for four or five years? I will still be gleaning the dividend and option money. You have to look past a major bull market, to things like a long lasting bear market.

About 15 years ago I was working for a company. My younger manager was buy a house...Market had gone up for years and years. I asked him what would he do if the price of the house drops? He stared at me for a second and said..."houses can go down in price"???

I'm not sure what your anecdote has to do with anything. When stocks go down, your calls do little in the form of protection.

In hindsight of 20+ years (a longer career than most investors), are you better off or worse off by overwriting the calls vs just owning those stocks in totality?