Covered Call writing

Quote from ktm:

Agreed. It's all about the losses. Keep the losses small and the winners will take care of themselves.

I hope no one assumes that a successful covered call writer shorts calls and then sits back and hopes until expiration.

This is another reason the fundamentals are important. If we drop like a stone, I should be happy because I have done my homework and I know the market is mispricing some event. If you do your homework on the underlying, you should not be surprised by stock movement. The drop should be an opportunity.

Too many here just want the holy grail...the effortless route to near riskless millions. It seems the relentless pursuit of such prevents some from developing the skills required to actually become profitable.
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OK KTM, let me ask you this question. If all you are really after here is a couple of points why not put on a collar or condor. You have the same upside without any of the risk. See that is what I'm not understanding. I hear you when you say you are doing all this research which is kind of puzzling since you want actually be participating in the upside. So I'm kind of confused at what your trying to do here. If you are just trying to earn small profits every month covered calls is not the way to go because you really have no control over your downside. Hell half the time you will get stopped out of your stock and be forced to buy the call back which will offset the small gains you make from month to month and then once or twice a year you will get killed on a gap down. At the end of the year what you do you really have in profits?

Please understand I'm just looking at your position from a risk to reward standpoint. The whole idea behind covered calls was a strategy created by brokers in the 80's to sell to the public to get their customers who refused to agree to get in and out of stocks, basically to create added commissions. It was an easy sell to the public then and Wade Cook re-sold the same scam in the 90's. I'm not implying that covered calls is a scam, I'm just saying they were created not for their usefulness but rather their ability to generate additional commissions for brokers.
 
Quote from TKOtrader:

Quote from Maverick74:



you really have no control over your downside. [/QUOTE


there are methods to control the downside and gaps down
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OK, let me ask this again. Maybe I'm not asking this the right way. But why not just do collars or condors instead of covered calls?
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Quote from Maverick74:


Hell half the time you will get stopped out of your stock and be forced to buy the call back which will offset the small gains you make from month to month and then once or twice a year you will get killed on a gap down. At the end of the year what you do you really have in profits?
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Based on this statement, I'm not sure you understand what I'm doing. I NEVER get stopped out. There are no stops. The company needs to be fundamentally strong. I don't mean you looked at a chart for a few hours and checked the PE on Yahoo. I'm not talking about spending a half hour checking the financials and skimming the latest 10Q. Real research. Real work. Know the business as if it were your own. There is averaging down and buying more when the stock retreats. I know a lot of trader types on this board abhor that kind of strategy. Fine. That's part of the reason I don't talk about it much here - cause traders keep poo-pooing me about it year after year. About once a year, I come out of my shell and post a bit about it here. If the fundamentals have changed, if someone lied or if there are other conditions present that have caused the company to no longer be attractive, then I would sell.

If I want to keep the stock, I may buy the call back at parity or let some get called away. Keep in mind I probably had some puts out there that expired worthless if my calls are ITM.

You like examples...so here ya go. With a stock at $48 that I own, I would sell the $50 front month call with 4 -6 weeks left, and sell the $45 put. Say I get $3 for each. At expiry, if we are at $60, if the stock is overvalued I allow it to be called and I make $8 or 16+% (called at 50, plus $3 and $3.) At $40 at expiry, I now own more stock at a cheaper price (43.50 basis assuming I doubled up). I can then write the $45 call and the $35/$40 Puts.

Keep in mind, we are talking a quality company that you are ecstatic to get at $40...that you were happy to get at $48, not something you threw a dart at. I always want more stock at cheaper prices and might want to sell if the price goes high enough. I almost never buy options. Sell and sell and sell more. That's just more stock at cheaper prices or more premium. Getting called away on that example and raking 16% (anywhere over 50) is not a few bucks - it adds up.
 
Why not do collars with leap puts on stocks that pay fairly good dividends. Just figure the cost of the put as an addition to the stock purchase price and see if the dividends plus the sold calls each month give a decent return on the stock plus the put. Only do front month calls.
 
Quote from ktm:



Based on this statement, I'm not sure you understand what I'm doing. I NEVER get stopped out. There are no stops. The company needs to be fundamentally strong. I don't mean you looked at a chart for a few hours and checked the PE on Yahoo. I'm not talking about spending a half hour checking the financials and skimming the latest 10Q. Real research. Real work. Know the business as if it were your own. There is averaging down and buying more when the stock retreats. I know a lot of trader types on this board abhor that kind of strategy. Fine. That's part of the reason I don't talk about it much here - cause traders keep poo-pooing me about it year after year. About once a year, I come out of my shell and post a bit about it here. If the fundamentals have changed, if someone lied or if there are other conditions present that have caused the company to no longer be attractive, then I would sell.

If I want to keep the stock, I may buy the call back at parity or let some get called away. Keep in mind I probably had some puts out there that expired worthless if my calls are ITM.

You like examples...so here ya go. With a stock at $48 that I own, I would sell the $50 front month call with 4 -6 weeks left, and sell the $45 put. Say I get $3 for each. At expiry, if we are at $60, if the stock is overvalued I allow it to be called and I make $8 or 16+% (called at 50, plus $3 and $3.) At $40 at expiry, I now own more stock at a cheaper price (43.50 basis assuming I doubled up). I can then write the $45 call and the $35/$40 Puts.

Keep in mind, we are talking a quality company that you are ecstatic to get at $40...that you were happy to get at $48, not something you threw a dart at. I always want more stock at cheaper prices and might want to sell if the price goes high enough. I almost never buy options. Sell and sell and sell more. That's just more stock at cheaper prices or more premium. Getting called away on that example and raking 16% (anywhere over 50) is not a few bucks - it adds up.
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KTM,

Listen, I'm not trying to give you a hard time. I understand exactly what you are doing I am just trying to get you think a little differently about it. First of all, I thought you were just selling the call, but you are really selling the straddle. At least in that example or strangle if you will.

But I keep coming back to this underlying theme of you looking for really good stocks. If they are really good then there is a good chance they are going to get called away. See why not just sell naked puts then on stocks that you are long. This way you can keep earning the premium all the way up while the stock is rallying and if the stock tanks you just get to buy more cheap stock that you wanted to buy anyway.

I don't understand the idea behind wanting to get called away on your stock. I mean let's say you did this on QCOM back in 99. When QCOM went from 100 to 1000 in a year. Now if you really liked that stock because of all this research that you are doing, why not just keep selling qcom puts all the way up. Every time qcom dipped you would have bought more stock. At the end of the year you would have made a killing. But with the strategy you are presenting here, you would have been called away on a great stock and missed one of the most powerful moves in history.

All I'm doing here is listening to what you are saying and trying to figure out what your motive is for doing what you are doing. You obviously really like these companies so why would you want to run the risk of being called away on them. If you just wanted to earn 2 to 3 pt credits you can do that with collars and condors and have little to no risk. But if you really like the stocks, I would just sell the puts every month. I think when all is said and done, you will have substantially higher profits at the end of the year. Am I missing something here?
 
"You like examples...so here ya go. With a stock at $48 that I own, I would sell the $50 front month call with 4 -6 weeks left, and sell the $45 put. Say I get $3 for each. At expiry, if we are at $60, if the stock is overvalued I allow it to be called and I make $8 or 16+% (called at 50, plus $3 and $3.) At $40 at expiry, I now own more stock at a cheaper price (43.50 basis assuming I doubled up). I can then write the $45 call and the $35/$40 Puts."


thats interesting but how do you get $3 for a front month option on a safer type stock. i just looked up 2 examples. c at 47.5. jan options are .20 for jan 50 call and .40 for 45 put.even if we move up to a more volitile stock like klac at 57.a jan 55 put is 2.10 and a 60 call is 1.45. unless your willing to move up to riskier stocks you wont get 3 for front month options in this low volitility enviroment.
the reward has gotten a lot smaller this year.
 
yeah, that was probably an old example with those numbers, back when we had some volatility.

Mav,
There is some discretion. Not every month I sold the calls, not every month I wrote the puts. I liked selling the calls after a move up, selling the puts after a move down etc... Using the technicals a bit when deciding what to write and where. Looking at the premium and sometimes deciding the amts weren't worth it.

This whole biz about QCOM going to 1000. Read back a few posts!!! I CAN"T HOLD IT THAT LONG, remember???

I buy at 100, I'm crapping my pants at 200...would be lucky to break 150 and still own it, and forget valuation. Good stocks don't always go straight up. Good luck finding that next 10 bagger.
 
Quote from ChrisM:




I see, that`s why I didn`t know. But why Brazil ? Are there any other places to escape ?
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ever dated a Brasilian chick????

They are DA BOMB!!!!!!!!
 
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