Covered call is more risky than it appears?

[pattersb]

Buy2Sell, why leverage? If you have a workable strategy, why buy on margin?

 

[roger77]

Quote from pattersb:


Selling worries me because of the possibility of having to deliver.. But, selling OTM contracts outside the trading range, is something I'd like to develop an expertise in. Could you suggest any links/resources?

You may check options reports at investment-tools.com. There are couple of repors that list options with high probability of profit for sellers of the options. In essence they are options with low probability of profit for buyers based on options pricing model. That is a free site.

 

[Buy1Sell2]

Quote from pattersb:

Buy2Sell, why leverage? If you have a workable strategy, why buy on margin?

If selling premium that is not covered by owning the underlying, then you must post margin in case it works against you.

 

[Buy1Sell2]

Quote from pattersb:

I'm confused by "buying it back", obviously you're not buying back the same actual contracts you've sold. So, if you holding the the same amount of contracts you've written, you aren't required to deliver? Or if called, do you deliver the contracts in leiu of the stock?

sorry about the dumb questions ..., just beginning ...

You need to get hold of an options book like the old one that George Angell(shady character) had written (Ag options mostly, but the basic principles are there). At this time, I would recommend that you do not try to get into Riskarb's posts as they are well beyond your understanding at the present time. Riskarb has tremendous mathematical acumen and of course I have respect for him, but you won't need the full blown math to begin the process or later on to be successful.

 

[Buy1Sell2]

Quote from novel20:

You can always buy back till right before expiration. After the contracts expired, you have to deliver the underlying if the other party exercise their rights.

Correct--by buying it back , you are just offsetting your position at he particular strike. For example you may have sold a 100 call which would require you to deliver at 100, but if you buy an option at 100 call option later, then you now have the right to"call" someone elses away and you would be able to deliver. Thus, the positions offset and you are no longer on the hook to deliver.

 

[Buy1Sell2]

One more point about covered calls. They are passed off as being "safe". What this means is that you will lose a little each time and eventually gradually lose it all. Why not make a little each time and gradually be wealthy?

 

[novel20]

Because you keep selling OTM options and collect those lovely premiums, and then finally on one trade the OTMs become DITMs and all your previous profits were wiped out.

 

[Buy1Sell2]

Quote from novel20:

Because you keep selling OTM options and collect those lovely premiums, and then finally on one trade the OTMs become DITMs and all your previous profits were wiped out.

The answer to that is the overextension argument that I have been making. If not overextended, this will not happen.

 

[novel20]

In that case, the profits will still be wiped out, but you still have a major chunk of your trading capital.

 

[Buy1Sell2]

Quote from novel20:

In that case, the profits will still be wiped out, but you still have a major chunk of your trading capital.

The difference in our thinking here is that without being overextended, I would be selling more new OTM strikes and increasing those in quantity. I will have time on my side and at expiry, I will make a lot of money. This is one of the secrets to short options. Don't be greedy with the first entry. Give yourself room to add. It's easy to get greedy--you like to see the money in your account. The trades that go against me--occasionally wildly-- are my big winners.