Covered Call Strategy

[butterfacetrader]

So no to the brilliant synthetic bull vert?

Is your life so bad that you have to resort to constant cynicism, dishing of negativity and trolling on an internet forum? Kinda lame. You seem to have a superiority complex. Never got much love from your boss/superiors or have daddy issues?

It was never a recommendation nor a stock analysis. Clearly if it was me, after getting a day like today for DDD, I would have taken profits as the S&P marched back towards all time highs. OP can do as OP wishes. He sees more upside but also doesn't want to sell. $60 strike is not far out so selling a call out to Aug may be asking for trouble limiting upside gain while no downside protection as correction may loom near with each passing day. Topic is about covered calls. You added nothing but troll posts, one of which you or a mod deleted. OP has moved on. After this I will too.

 

[drownpruf]

You seem to have a superiority complex.

The guy states he's bullish and is trying to remain inside the strike. So you run with a synthetic bull spread at a loss of edge that will net the guy not a single dollar from the vola. I don't typically get involved unless someone is recommending a circle jerk as you have. The collar is dumb. So yeah, I felt compelled.

Yes, he could sell the reversal at a loss of edge. wtf not? The guy brings up CC and you tell him to go into a collar at an edge loss.

He could also sell the 2015 synthetic and cover here, but wtf does that have to do with covered calls?

 

[FXforex]

Lets go with real numbers based on the OP and see how the position unfolds. We can follow it until August 16.

• 100 Shares DDD presently at $55.02 http://finance.yahoo.com/q?s=ddd
• Sell 1 contract Aug16 2014 60.00 call at $2.44 http://finance.yahoo.com/q?s=DDD140816C00060000

Account Balance:

• 100 DDD shares = $5502.00
• 1 short call = $244.00
• Total = $5746.00

PS .... There is know way of adjusting a CC without compromise. When you put lipstick on a pig you still have a pig.

 

[butterfacetrader]

The guy states he's bullish and is trying to remain inside the strike. So you run with a synthetic bull spread at a loss of edge that will net the guy not a single dollar from the vola. I don't typically get involved unless someone is recommending a circle jerk as you have. The collar is dumb. So yeah, I felt compelled.

Yes, he could sell the reversal at a loss of edge. wtf not? The guy brings up CC and you tell him to go into a collar at an edge loss.

He could also sell the 2015 synthetic and cover here, but wtf does
that have to do with covered calls?

First there was no recommendation. It was a discussion. Investing is about growing & protecting assets. A collar does that. Straight up CC doesn't. Especially for momo names on the long side, protecting downside and letting upside run is more important. No point capturing dollars on covered calls and risk tens of dollars in capital losses.

But wait what was your trade again professor?

You felt compelled to troll since your first post here that is now deleted. No need to pretend taking a high road now. So are you done? Have you finished having your daily dose of exercising superiority over the internet because your own real world life sucks and you feel inadequate? Great. Lets move on.

 

[Option_Attack]

An interesting strategy, at least to a boring person like me, is buying and selling the stock using short options. You need lots of patience and a stock that will (hopefully) not crash and burn...maybe one that pays a good div?

1. Sell a put ATM or next strike OTM and a couple months out. If the stock doesn't hit your strike, just keep doing it. This is essentially the same risk curve as a CC.

2. If you are assigned and the stock is put to you, sell a call next strike OTM and a couple months out.

3. If your strike is hit and the stock is called, repeat 1.

An easy way to jack up prems a little is to sell both a put and a call when you are put the stock. You will get two prems, but may get put more stock if it keeps dropping.

This has the effect of buying when it drops and selling when it goes up, but you get to keep all the premiums. Of course if the stock quickly drops 50% or something, it will take a while to get it back. Adjust strikes and months to current volatility and your outlook for the stock.

Is this better than buy/hold? Not during a raging bull market, but if the stock is fairly range-bound you should do all right. With a good charting program and some volatility data from impliedvol.com, you can do a rough backtest to see if it is worth your while.

Good trading to all.

 

[drownpruf]

First there was no recommendation. It was a discussion. Investing is about growing & protecting assets. A collar does that. Straight up CC doesn't. Especially for momo names on the long side, protecting downside and letting upside run is more important. No point capturing dollars on covered calls and risk tens of dollars in capital losses.

But wait what was your trade again professor?

You felt compelled to troll since your first post here that is now deleted. No need to pretend taking a high road now. So are you done? Have you finished having your daily dose of exercising superiority over the internet because your own real world life sucks and you feel inadequate? Great. Lets move on.

I never deleted a post. I edited one as I looked up the ticker and priced the risk-reversal. The guy mentions a CC and you mention a collar at a loss of edge. Brilliance aside, it does not "grow and protect" shit. The long 25D reversal trades at a debit. You talk mindless shit instead of offering anything approaching the risk-profile he is looking for. Lock in a loss on the downside and at a debit on the hedge.

I told him. Sell the shares in a 2015 synthetic and walk away. If he wants to write calls then look to a put-writing program.

I edited the following post by adding the last sentence you see, once I had priced the 25D RR:

http://elitetrader.com/vb/showpost.php?p=3980797&postcount=11

And this was my first post to this thread:

http://elitetrader.com/vb/showpost.php?p=3980721&postcount=4

 

[jimmyjazz]

I'm curious to hear more about a low-cost collar and why it's a "bad idea" in this instance, given the OP's view on the stock. Say he sells the Aug $60 call and buys the Aug $46 put for essentially a wash. Yes, he is capped on the upside but he also has some downside protection, and certainly can't lose all of his original investment.

I would argue that $60 is a bit too close for comfort 3 months out -- the 1SD point is ~ $67 -- but that's a different argument. What exactly is wrong with the collar? Is it the fact that the "income" from the covered call is no longer realized?

drownpruf, I'll admit I don't always understand your shorthand lingo, so anything you might do to dumb down the answer would be appreciated.

 

[newwurldmn]

I'm curious to hear more about a low-cost collar and why it's a "bad idea" in this instance, given the OP's view on the stock. Say he sells the Aug $60 call and buys the Aug $46 put for essentially a wash. Yes, he is capped on the upside but he also has some downside protection, and certainly can't lose all of his original investment.

I would argue that $60 is a bit too close for comfort 3 months out -- the 1SD point is ~ $67 -- but that's a different argument. What exactly is wrong with the collar? Is it the fact that the "income" from the covered call is no longer realized?

drownpruf, I'll admit I don't always understand your shorthand lingo, so anything you might do to dumb down the answer would be appreciated.

OP isn't concerned about downside protection. Collars are generally used as a hedging mechanism. You are willing to sell off upside to cheapen your hedge.

OP is confused. He wants to receive income and doesn't want to part with the stock because it can go to 100; but if he does get called away, he will be happy with the return.

If OP thinks the stock will go to 100 in the next 2 years, the option markets don't agree with you. You should see a mispricing where the vol is too cheap and he should be buying calls hand over fist rather than selling them.

 

[jimmyjazz]

Thanks. What tells us that calls are cheap (and should be bought) rather than sold? Similar question for puts?

 

[drownpruf]

I'm curious to hear more about a low-cost collar and why it's a "bad idea" in this instance, given the OP's view on the stock. Say he sells the Aug $60 call and buys the Aug $46 put for essentially a wash. Yes, he is capped on the upside but he also has some downside protection, and certainly can't lose all of his original investment.

I would argue that $60 is a bit too close for comfort 3 months out -- the 1SD point is ~ $67 -- but that's a different argument. What exactly is wrong with the collar? Is it the fact that the "income" from the covered call is no longer realized?

drownpruf, I'll admit I don't always understand your shorthand lingo, so anything you might do to dumb down the answer would be appreciated.

The collar is a synthetic bull call spread:

Long stock + short call = synthetic short put. Long put (natural) added. Results in a short put at y, long put at x. A credit put spread (bull) = a debit call spread (bull), as defined by box arbitrage.

So the collar is equivalent to a bull call debit spread (among others). There is a downside (under mkt) skew, which makes the synthetic call spread trade at a loss of edge when compared to the ATM strike vola. IOW, it's not ideal to go deep with THIS bull call spread as you're paying for the down and out skew. The skew is a demand for OTM puts.

Collars are derp even when done symmetrically at a credit. This one would be done at a debit (symm). The exception would be when you actually want to own the vert in lieu of shares, then great, but best to trade ATM or OTM to avoid edge loss and make money on sticky-delta (vol rise as spot moves through strikes).

Think of buying a collar on SPY. You experience edge loss in the long OTM puts. You will add to cost-basis if everything is unch at expiration.

OP was trying to reduce his cost-basis, not add to it.