Covered call strategy feedback

A

arman555

I have been in forex and trading for long but not in options. So i was thinking about this and hoping you guys can give me a feedback.

Start buy Selling Call option and Buyingthe underlying. (best if its forex).
Put a stop loss for BUY trade exactly equal to the amount of premium received.
Exit both trades when the stop loss is hit. Or let it expire.
Example: Premium received = 100, Underlying goes down and hits the SL, total loss = 100 - some premium. (lets say 80). If the underlying goes up, we let it expire, Profit = Premium.

On Each trades its either smaller loss or bigger profit. What is wrong with this?
 
arman555 said:
As i said, we close option side too once the SL is hit.
More...

Try to calculate expectancy after doing this trade 100 times. What's your win %, average win/loss. Are you making or loosing money net?

Collected premium is typically much less that your loss amount on the underlying. Eg. might take 4 winners to offset one loser. But then again, anything can work if expectancy is positive. Just for the sake of example - you're ok if let's say you are winning 9 times out of 10 even with avg loss being 4 times of avg win. Model few hundreds of trades and see if it makes money consistently enough to be useful.

I doubt this strategy will survive such test though.
 
Try it on paper...
Your stop loss would be very tight.
And when you get stopped, you also have to consider margin changes of your naked short call position that needs to be closed.

Plenty of risk for a tiny gain.
 
cesfx said:
Try it on paper...
Your stop loss would be very tight.
And when you get stopped, you also have to consider margin changes of your naked short call position that needs to be closed.

Plenty of risk for a tiny gain.
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Thank you, Stop loss was just one way to do it. Algo can do it in such a way that options closes first then the underlying.

Dumb question though, a quick look shows that the premium is more or less equal to the movement that happens in a given time.

also can anyone please suggest me a broker that has futures and options and paper account where i can trust the paper pnl, like no delayed data and modified demo data stream.
 
I just looked up at eurusd future chain, 7 days ATM pays about 60pips, ATR is 225 on the weekly.
The monthly is like 160premium vs 350 ATR....
 
ValeryN said:
Try to calculate expectancy after doing this trade 100 times. What's your win %, average win/loss. Are you making or loosing money net?

Collected premium is typically much less that your loss amount on the underlying. Eg. might take 4 winners to offset one loser. But then again, anything can work if expectancy is positive. Just for the sake of example - you're ok if let's say you are winning 9 times out of 10 even with avg loss being 4 times of avg win. Model few hundreds of trades and see if it makes money consistently enough to be useful.

I doubt this strategy will survive such test though.
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I am glad that you are looking at the math side of things, which is what i do. I need a trustable options broker where i can trust the PNL on paper account. I am not sure what size of a trader are you but if you can give me a proper futures broker preferably with low margin, it would be great.
 
cesfx said:
I just looked up at eurusd future chain, 7 days ATM pays about 60pips, ATR is 225 on the weekly.
The monthly is like 160premium vs 350 ATR....
More...
who is the broker ? also did you take into account the Delta of the option?
 
You can try interactive brokers or thinkorswim, I don't think you can have non delayed real time data for free anyway, or even accurate option fills.

It's good to play around, and study.
When one discover options coming from spot/fx, at the beginning it all looks very promising, then the more one learns the more one realises that he doesn't know anything.
 
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