Continuous rolling of covered calls

F

ferrycorsten

What is wrong with this strategy?

Sell ITM covered calls. Buy back before expiration, roll to next month, same ITM strike. Repeat.

The roll should always yield a credit since you are selling a call with more time value than the one you buy back.

Basically you can do this an unlimited amount of times, even if calls go deep ITM, until you get assigned.

Thoughts?
 
This only works if the stock drops or remains somewhat unchanged.
If the stock rises, it will be too costly to buy it back.

If you are able to do it, calculate what your annualized % return will be on a given trade.
While it may seem like the strategy is working, if your earning a puny single digit annualized return,.... it may not be worth it.

But it should work if the stock drops, so you can close the trade cheaply, and then wait for it to rise, before selling another call.
Then wait again for time decay to work it's magic and/or for the stock to fall again, so you can close it cheaply again.
That's a lot of "ifs".

It's more likely to work when the occasional stock you have a call on drops, vs hoping to do it as an overall strategy.
If the stock rises, which is not a bad thing, then you will probably end up holding the stock and call till near expiration.
So keep that in mind, when you decide how long a contract you are selecting.
 
As an alternative, think of the following strategy. Lets say you take SPY or whatever is your favoured ETF and write a 1 month call on it. If nothing happens, you keep rolling these calls. If you get assigned, you take the cash (which now includes the proceeds of the sale) and sell 1 month puts against that cash. If you get assigned on the puts, you take the stock and sell covered calls again. Rinse, repeat. On average, you will be selling the stock at rich levels and buying at cheap levels and overall should do better then the market.
 
Quote from oldnemesis:
It is so common the CBOE maintains a buy-write (another term for covered call) index:
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Yeah, and for simply holding BXM you just need to buy an ETF
 
There's an ETF for everything... nearly.

If you held PBP for the past 5 years you would be down about 20%.... the S&P would be a little above zero:

z


(ignoring dividends)
 
Quote from oldnemesis:

There's an ETF for everything... nearly.

If you held PBP for the past 5 years you would be down about 20%.... the S&P would be a little above zero:

z


(ignoring dividends)
More...

dividends matter here a lot because the PBP doesn't reinvest proceeds. It passes the income on to you as a dividend. PBP from 2008 to 2012 returns 6.2% including dividends and capital gain payouts. BXM returns 12% and SPTR return 15%.

So lesson here is that PBP is not a good fund to get buywrite exposure and SPTR outperformed both over that period. Frommy graph, most of this outperformance came in 2012.
 
Quote from newwurldmn:
PBP from 2008 to 2012 returns 6.2% including dividends and capital gain payouts.
More...
I think something is off in these calculations - a cursory look shows that the stock itself is flattish today from Jan 2008 at about $20/share and that the total div paid out was approximately $5 which makes net return over that time about 25%. Could you check, I am in a useless meeting with a bunch and posting from a telephone
 
Quote from sle:

I think something is off in these calculations - a cursory look shows that the stock itself is flattish today from Jan 2008 at about $20/share and that the total div paid out was approximately $5 which makes net return over that time about 25%. Could you check, I am in a useless meeting with a bunch and posting from a telephone
More...

I used the COMP calculator in Bloombeg. 1/1/2008 to 12/31/2012; price appreciatino was -18%, total return 6.2%, annal eq 1.24%

It looks like starting price was closer to 24. and now it's 20. divs must be around $5.
 
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