Covered call: How do you pick best expiration month?

[DJR]

i agree...google put call parity and do a lot of research.
the best thing to remember when trying to learn stuff about options is that once you hedge an option, or use options offset against the underlying your risk dramatically changes. Once you start hedging using the underlying your calls become puts, and your puts become calls. this never makes sense until you start actually understanding put call parity....and that takes homework.
look for information that will give you such simple formulas as

long call and short stock = long put
long put and long stock = long call
short call and long stock= short put
short put and short stock = short call.

You could read an option book by Natenberg....great if you love maths, but look for simper things first.
When using options look at the exposure of your position.
are you really long, or really short. When you ask these questions then the formulas above will make more sense.

Also in terms of the actual question of which months i would suggest unless you are a longer term investor your analysis should really involve picking which month as a part of the analysis, and as per most trading.....its a matter of doing it consistently time after time. Especially if you are writing options.

 

[MajorUrsa]

Quote from DJR:


You could read an option book by Natenberg....great if you love maths, but look for simper things first.

Thanks for stepping in DJR, and all others too. It is so damn frustrating to see all these newbs lured in by this so-called risk-diminishing strategy.

About books: I'm beginning to think that if one is not able to understand Natenberg, at least partially, one should not touch option-trading.
If Natenberg is to difficult as a primer, at least look for a book that mentions the synthetic equivalence s=c-p, and its corollaries. Any book that does not explain that a CC is _exactlly_ the same as a naked put is not worth reading, and may even contain other dangerous omissions.

Ursa..

 

[MajorUrsa]

Quote from gkishot:

Yes, the risk/reward ratio is virtually the same. But in terms of generating the income as was discussed in the previous post you have to be bullish on stock to collect income for naked puts & you have to be bearish on stock to collect income for covered calls.
So strategically they are different.

No, no, no. Not true! They are exactly the same man.

Why would you own a CC when you think the stock goes down?? The position will lose exactly the same amount as when you owned the naked put.

Look, take a piece of paper, write down the number and do the math. It is really not very complicated.

Ursa..

 

[Opra]

Quote from vhehn:

a perfect example. as many times as it is explained some just dont get it.

Because some (or maybe, most) don't think a paper loss is loss and believe stocks will always go up

 

[tradebanzai]

Thanks everybody for reply.
I will do research that's for sure. But before getting deeper it is interestnig to have some general idea and it's very interesting and useful what I've learned on this forum.
"...It is so damn frustrating to see all these newbs lured in by this so-called risk-diminishing strategy...". Just to make it clear: I'm really far from thinking there's anything simple in trading. Trading is business and options just another instrument, I guess it's important to know as much as you can. Hope a bit later we could talk the same options language

 

[gkishot]

Quote from MajorUrsa:

No, no, no. Not true! They are exactly the same man.

Why would you own a CC when you think the stock goes down?? The position will lose exactly the same amount as when you owned the naked put.

Look, take a piece of paper, write down the number and do the math. It is really not very complicated.

Ursa..

Yes, P/L is the same. But in case one does not care about unrealised P/L & just wants to collect an income ( meaning that his only concern is that they will expire wortless at maturity) then the timing for that is different.

 

[MajorUrsa]

Quote from gkishot:

Yes, P/L is the same. But in case one does not care about unrealised P/L

There is no such thing as unrealised P/L. That is where you go so horribly wrong.

When a stock dumps 20% of it's value you think this only happens for real when you sell it? No Sir!

Ursa..

 

[DJR]

yep it depends on if you are an investor and looking for yield, and hence a long term investor regardless, or a trader.
when i was a market maker a big client always used to be amazed that he used to sell us options and make money out it and we used to buy those options and also make money from them. what he did not take into consideration was that we used them to reduce our risk and very activetly trade the stock around them. generally profiting from the hedge we took. while his longer term view meant he was looking for yield over his very low turnover portfolio.
they are very different, but if you were to put the two opposing trades on at the same time the risk was different but the daily PL was also opposite. one lost one made.