Conservative Options Strategy

[dagnyt]

Quote from chrismontez:

This seems to be getting off kilter.

OK.

You bought a stock you want to own.
You hedged the bet by writing the call.

Nothing wrong with that.

Mark

 

[chrismontez]

"A CC is a BULLISH position: it's long delta, it makes a profit when the stock moves higher and it loses money if the stock moves lower (by more than the premium collected). That's bullish."

I find this statement interesting. While I agree that the delta on the short call is going to be less than 1 so overall you are long delta, if I have made a commitment to invest in a company for the long haul and ride out the short term swings, I might sell an OTM call as a way of collecting premium as the stock pulls back. So I would be selling a CC expecting a pullback- a short term bearish sentiment.
I realize I could use the premium to buy a put and setup a synthetic short, but then I make no $ on the drop, just protecting my stock in case of a huge drop.

 

[dagnyt]

Quote from chrismontez:

if I have made a commitment to invest in a company for the long haul and ride out the short term swings, I might sell an OTM call as a way of collecting premium as the stock pulls back. So I would be selling a CC expecting a pullback- a short term bearish sentiment.

Traders have opinions. That makes sense to me. Trading on those opinions must turn out to be profitable or else it would not be smart to continue to base decisions on those opinions. But, do most traders make an honest assessment of how right/wrong those opinions turn out to be?

I'm someone who recognizes that he has no skill in predicting which way a specific stock, or the market, is going to move over the short or longer term, I am often amazed by traders (especially traders who are new to the business) who

a) say that they have a specific expectation for a given stock - such as your statement that you only write covered calls on stocks when you don't believe they will run significantly higher or when you are short-term slightly bearish. (Obviously you don't expect them to crash.) and

b) <i>as a result of that opinion</i> adopt a specific option strategy.

Thus, I ask: How good is your track record? How often do you get it right? How often do you adopt the best option strategy? In this case, 'best' means the one that provides a good profit that is earned <i>due to your expectations coming true?</i>

For me, it was much easier to write covered calls (when I was writing them) on stocks that I thought had a very good chance to rise. The more I thought they would rise, the more anxious I was to write a slightly ITM call. (Equivalent to writing a naked OTM put,) That allowed plenty of room for error. If the stock rose just a bit, or held steady, or declined slightly, I earned a profit. I was not greedy. I had no need to buy a stock and hope it doubled. I was more than happy to write a covered call, collect the time premium and see the stock soar past the strike. That gave me the maximum possible profit for my chosen strategy. Cannot do better than that.

And best of all, I did not have to be a good stock picker. Just had to avoid being terrible. I like those odds.

Mark

 

[yucca_mtn]

The major lesson learned from this thread ought to be that, regardless of which option strategy you use, picking favorable market timing is several times more important than picking the right stock.

With that in mind, the case can be made that ITM vertical spreads offer more flexibility than covered calls, if the unexpected happens.