Covered Call writing

[ktm]

TKO,

Covered call writing is an excellent way to earn a living. I have been using this strategy for many years with great success. I think the key is to have a very strong knowledge of the underlying. First you need to be a fundamentalist who understands the business and the prospects for the fundamentals. Blindly writing puts and selling calls against existing positions will net you a good income month after month, but eventually a few overnight implosions will be costly.

Writing around these positions is a solid strategy provided you are comfortable owning the co at a much lower price, cause come tomorrow morning, it might be at a much lower price.

I like to play both sides for maximum effect. Write the CC to the upside and write the put to the downside, while trying to keep the straddle as wide as possible.

You have to look at your personality as a trader. People who talk about giving away their upside must be able to let their winners run in the real trading world. If you can do that, great. I found that I always sold too soon and cut off a lot of my upside, so CC writing fit my personality. For many it does not.

 

[Maverick74]

Quote from inandlong:

Are you sure about that?

I own stock that is going ex-dividend, and I am selling someone the right to buy the stock from me. How is it I have obligated myself to be assigned stock? Perhaps you meant write an ATM naked put.

Very simple. Any market maker on the floor who has a long call inventory that is going ex-dividend will automatically send his exercise notice the day before the stock goes ex-dividend. The reason for this is because if he doesn't do that, his call will drop in value by the dividend. So by exercising the calls he will have the same position as he did the day before only now he receives the cash dividend. He will do this 100% of the time. This is of course only when the calls have a delta close to 100. If they are barely in ITM he probably won't do this. Guys on the floor for years use to do this trade in size because in many cases it was an arbitrage play. They would sell stock and buy deep ITM calls and then exercise those calls before they went ex-dividend. On average they could make anywhere from .10 to .50 of free money on this trade and they would do it in very large size.

However the point to remember here is if you own deep ITM calls, you ALWAYS exercise them before they go ex-dividend. And if you are short deep ITM calls, expect to lose your stock.

 

[freehouse]

Quote from inandlong:

Are you sure about that?

I own stock that is going ex-dividend, and I am selling someone the right to buy the stock from me. How is it I have obligated myself to be assigned stock? Perhaps you meant write an ATM naked put.

For example, MO will be going ex-dividend on 12/18.

With the stock at 52 ish, if you have a covered call on the December months at any strike below 50, it would be optimal to exercise the calls to take in the dividend.

 

[Hello_Dollars]

Quote from ktm:

You have to look at your personality as a trader. People who talk about giving away their upside must be able to let their winners run in the real trading world. If you can do that, great. I found that I always sold too soon and cut off a lot of my upside, so CC writing fit my personality. For many it does not.

Very good point. Writing covered calls can help enforce a sell discipline that might otherwise be lacking.

As pointed out, it's somewhat facile to refer to a given options strategy as "good" or "bad". Rather, it's the application and management of the strategy, and whether it "fits" the particular trader's personality, that will determine the strategy's viability.

 

[inandlong]

Mav, free, I got ya. I was interpreting your initial post about being assigned as meaning I would have to buy stock I wrote a call on. Thanks for taking the time to provide the insight from the MM point of view Mav.

 

[canyonman00]

Quote from ktm:

TKO,

Covered call writing is an excellent way to earn a living. I have been using this strategy for many years with great success. I think the key is to have a very strong knowledge of the underlying. First you need to be a fundamentalist who understands the business and the prospects for the fundamentals. Blindly writing puts and selling calls against existing positions will net you a good income month after month, but eventually a few overnight implosions will be costly.

Writing around these positions is a solid strategy provided you are comfortable owning the co at a much lower price, cause come tomorrow morning, it might be at a much lower price.

I like to play both sides for maximum effect. Write the CC to the upside and write the put to the downside, while trying to keep the straddle as wide as possible.

You have to look at your personality as a trader. People who talk about giving away their upside must be able to let their winners run in the real trading world. If you can do that, great. I found that I always sold too soon and cut off a lot of my upside, so CC writing fit my personality. For many it does not.

I agree with you totally. I have sucesfully done this for the past four years also. Some would say he risk/reward ratio was not worth it, but I have made it work out rather well.

 

[hjcolvin]

canyonman00,

I am now implementing this strategy and I am trying to work out some of the details of the strategy. Basically where do you set your stops on the stock and what percentage do you set as a goal on the options.

Joe

 

[canyonman00]

Quote from hjcolvin:

canyonman00,

I am now implementing this strategy and I am trying to work out some of the details of the strategy. Basically where do you set your stops on the stock and what percentage do you set as a goal on the options.

Joe

I don't have any set criterion for my stops. Each trade is its own. It is all driven by my feeling about the economy and the market at the time of the trade. There are times when just a few points of return is ok for me. My overall portfolio growth goal is a minimum of 2% a month.

 

[hjcolvin]

Quote from canyonman00:



I don't have any set criterion for my stops. Each trade is its own. It is all driven by my feeling about the economy and the market at the time of the trade. There are times when just a few points of return is ok for me. My overall portfolio growth goal is a minimum of 2% a month.

Ok. My problem with this strategy is that I have had a few stocks move against me and I am trying to determine if I should set a stop at the stock price - premium. Also in learning to do this to generate a consistent profit should I look to make 30%< and then close the position or should I just ride a position out til expiration.

 

[canyonman00]

Quote from hjcolvin:



Ok. My problem with this strategy is that I have had a few stocks move against me and I am trying to determine if I should set a stop at the stock price - premium. Also in learning to do this to generate a consistent profit should I look to make 30%< and then close the position or should I just ride a position out til expiration.

Hmm, ok I'll say this. I set an exit strategy when I establish the positions. When that goal is met, I exit. I have no troubles mentally about leaving some profits on the table. My goal is to make my goal. It is a very conservative posture and it keeps my trading anxieties way down. Especially when I look at the amount of capital that I am working with. I don't think I'll ever make millions with this program, but that isn't the goal.

My overall criterion for this portion of my funds was to monthly net 200% of my monthly living capital needs. That covers my mortgages, car payments, planned savings amount, my monthly emergency fund contribuion, and a set amount for liquid cash needs should my computer business not do it.

Each of the last three years has found me flush with capital at year end using this strategy.