Buy write income strategy

Quote from newwurldmn:

Which trader hasn't at some point in their career followed this line of reasoning?
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Ya, I agree. I've spent ages looking at covered-calls and variations for some "income" type returns. It always felt like if I could finesse some variable just right, I could put together a portfolio that could earn a nice spread over bonds (etc.) with acceptable risk.

The problem I could never solve is (as was posted already) all it takes is one position being cut in half. If you continue selling calls, all you are going to do is realize a loss that all that call premium won't mitigate. If you stop selling calls in that case, you're stuck with hoping on a position, which is a stupid strategy.
 
The problem is that we think there is a special way to make it with option trading but the only survivors in this business are the guys/gals who have multiple strategies on and have the ability to understand and manage risk.

There is never a trade that will work over and over again. Thats why these seminar sellers should be imprisoned for messing with the lives of so many yet they are free to sell garbage for big money. I almost want to vomit when I hear the guys from compound stock earnings come on the radio and tell us all how great their 'clients' are doing with this loser strategy of selling covered calls. They should be selling used cars (no offense to used car sales people.)
 
l0kl1n and daveyc,

I hear you both. I've fallen in the same traps. It's easy to think there is a magic formula especially when you see that you can receive premium up front and it will probably expire worthless. But many thousands of dollars later you realize that you can't just buy options or sell them and expect to make money.
 
Quote from daveyc:

... the only survivors in this business are the guys/gals who have multiple strategies on and have the ability to understand and manage risk.

There is never a trade that will work over and over again.
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That sums it all up right there. To make it trading options you need to understand many strategies and know when to use each one. Strategies that work when IV is very high probably won't work correctly when IV is very low. Strategies that work when the market is moving up won't work when it is moving down. You also need completely different strategies to work when volatility and/or the market is trending sideways. As mentioned there is NOT a single option strategy that will work for any given underlying at all times in all market conditions.
 
I've done stocks in a rectangle formation using a covered call strategy.

Works best for me where I'd like to enter long in the middle of the rectangle, don't have any good indication if it is going up or down, and sell a slightly OTM call in a near month (up to 90 days) which is where I would have taken profit anyway if i had had a quick run up to that level.

If it goes up immediately, I'll unwind both positions or let some vol premium burn off if vol blows up, as it usually doesn't stay blown up.

If it goes down, i'll cover when the option is nominally cheap (under 50 cents, relative to entry).

If it goes nowhere I'll burn theta.

For example, trading MON in a 65-75 range, I entered in high 60's, rode it to 70, sold a 72.5 front month call for .85, then covered that at .10ish on pop back down, next pop up re-sold the 72.50 call in the next month for $1.05, and am sitting on the both of them. Once I cover the 72.50 call I'll probably not re-write it as rectangles don't last forever.

Risk obviously is to the downside.

Criticism welcome.
 
Quote from drsteph:

I've done stocks in a rectangle formation using a covered call strategy.

Works best for me where I'd like to enter long in the middle of the rectangle, don't have any good indication if it is going up or down, and sell a slightly OTM call in a near month (up to 90 days) which is where I would have taken profit anyway if i had had a quick run up to that level.

If it goes up immediately, I'll unwind both positions or let some vol premium burn off if vol blows up, as it usually doesn't stay blown up.

If it goes down, i'll cover when the option is nominally cheap (under 50 cents, relative to entry).

If it goes nowhere I'll burn theta.

For example, trading MON in a 65-75 range, I entered in high 60's, rode it to 70, sold a 72.5 front month call for .85, then covered that at .10ish on pop back down, next pop up re-sold the 72.50 call in the next month for $1.05, and am sitting on the both of them. Once I cover the 72.50 call I'll probably not re-write it as rectangles don't last forever.

Risk obviously is to the downside.

Criticism welcome.
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If this is a comfortable way for you to trade and you feel good about your stock selection then continue. But as I look at a 1 year chart on MON, looks like this can move big time in both directions.

Just consider your risk, it hit $44 then moved to $76 in a 7 month time frame with a lot of movement in between. I would encourage you to consider a collaring strategy to protect you when this stock tanks. There are different ways to collar, just consider a safer way to protect your account and get away from covered call trades. But, as you say, risk to the downside, its substantial and I would say unacceptable risk.
 
Quote from daveyc:

If this is a comfortable way for you to trade and you feel good about your stock selection then continue. But as I look at a 1 year chart on MON, looks like this can move big time in both directions.

Just consider your risk, it hit $44 then moved to $76 in a 7 month time frame with a lot of movement in between. I would encourage you to consider a collaring strategy to protect you when this stock tanks. There are different ways to collar, just consider a safer way to protect your account and get away from covered call trades. But, as you say, risk to the downside, its substantial and I would say unacceptable risk.
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I agree with Daveyc here. If you are OK with having a limited upside potential and unlimited downside potential you can get the same P/L potential selling naked puts at the strike you would otherwise be selling the calls. You wouldn't even need to have the stock in this case. I don't really suggest this either but wanted to use this to demonstrate synthetics. If you really want to own the stock and use a collar then you could write your covered call and then buy a put below your purchase price (probably at $65) to limit your downside. Once again using synthetics you could get the same P/L potential by writing your call at $72.50 and just buying a call at the lower strike (once again around $65). This spread would give you the same upside potential as your covered call with a limited downside.

There are of course many more examples of ways to limit your downside but IMHO you should make sure to use some manner of protection.
 
Quote from drsteph:

For example, trading MON in a 65-75 range, I entered in high 60's, rode it to 70, sold a 72.5 front month call for .85, then covered that at .10ish on pop back down, next pop up re-sold the 72.50 call in the next month for $1.05, and am sitting on the both of them. Once I cover the 72.50 call I'll probably not re-write it as rectangles don't last forever. Risk obviously is to the downside.

Criticism welcome.
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When you have good timing and selection, it works. When you don't, you get burned.
 
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