Covered Calls and Implied Volatility

A

Abundance Magnet

I'm looking at the optimal times to sell covered calls and have a question for you experienced traders:

does IV increase at the end of the trading day, or at the beginning of the trading day? these two periods are typically more volatile and I wonder if IV increases, and if that increases the price of options?

likewise, does the bid-ask spread just widen during those times, making this a moot point, or is there a benefit to selling calls during those 2 time periods?

thanks!
 
When I was buying/selling options, I noticed the premium changes tracked the underlying more than anything else. I also noticed the MMs knew if the underlying would move up or down better than I.

How do I know? If they accepted my buy closer to the ask, invariably the underlying would moved up later. The reverse was true whenever I sold.
 
yeah, i've noticed that too. initially i'm happy that my CC sold at a limit price set higher up, and then a few minutes later I see the price move up higher. the MM seem to plan these things in advance since they control the B-A prices, and the B-A spreads.

without getting into a victim mentality, how are other traders pricing out the covered call prices? do you sell at set prices, or sell at market when the time is 'right?'
 
I am no expert. However in the past when I sold Covered Calls against my long term position, I would wait till the underlying price approached resistance, then try working the sell. Waiting till after resistance is confirmed seems to result in lower premium (everybody knows it is going down). I would buy them back once I was able to keep most of the premium allowing another trade (I forget what my target buy back was, but kept GTC order outstanding to close it at my price). SPY & IWM was my primary underlying's, so not sure about specific stocks. I observed no pattern to IV during the day, except the 1st 15min of trading I "assumed" to be amateur hour (a greater likelihood of irrational price movement). --
 
IV changes according to the perceived volatility of the underlying stock. In other words, you may see higher (or lower) IV at the end of the day compared to the beginning of the day if something happened during the day to increase the probability of volatility. I.e. a news bulletin or macro action.

If it's a quiet news day, the IV should stay the same throughout the day (more or less). At this point, as time passes the time value of the option will decrease by a small amount. Therefore, you may eek out a penny or two more earlier in the day than late in the day.

The Bid-Ask spread is dictated by the volume of the option contract. If it's thinly traded the bid-ask will be wide. If it's widely traded (like SPY options) it will have a narrow bid-ask.

Generally the 'midpoint' should track the underlying, and the bid-ask spread should represent the volume. This is regardless of the time of day.

I would suggest to not worry about 'time of day' as a factor on its own. It's more of what happens DURING the day that affects option prices. Higher volume during opening and closing hours may actually be what you are observing (as this is when a lot of orders get filled).
 
If you are interested in this strategy (which is not a good one overall) you might as well sell naked puts. It's essentially the same thing. If you aren't willing to sell naked puts, you certainly shouldn't be selling covered calls.
 
Selling cc is fine as long as it properly aligns with your investment goals and strategies.

Did the research on selling puts and I disagree on selling puts to being superior to calls. The logic for selling puts over covered calls is flawed for my investment strategy.

Here are the reasons:
1) I want to hold the stock longer term, so prefer to sell OTM calls.
2) the idea of it it being a good thing to buy/put a stock at a set price is flawed because it does not take into account the new information that caused the stock to drop. This is a common misconception of many traders. They want to buy low to sell high, but often they end up buying to sell lower.
3) selling the stock at a higher price actually confirms the trend. Of course, ideally I hold onto the stock and increase my position size, however, getting called out just confirms the trend. Buy high to sell higher.

If you could share how selling puts allows me to achieve that same mentality, I'd love to learn more.

Thanks
 
surfer25 said:
If you are interested in this strategy (which is not a good one overall) you might as well sell naked puts. It's essentially the same thing. If you aren't willing to sell naked puts, you certainly shouldn't be selling covered calls.
More...
From an equivalency point of view, they are the same. However, there must be subtle differences otherwise brokers won't sell the notions that covered calls are low risk and naked puts are deemed too risky and not allowed for newbies (@ my brokerage) until we become "experienced" traders.

So what exactly are the differences?
 
ironchef said:
From an equivalency point of view, they are the same. However, there must be subtle differences otherwise brokers won't sell the notions that covered calls are low risk and naked puts are deemed too risky and not allowed for newbies (@ my brokerage) until we become "experienced" traders.

So what exactly are the differences?
More...
They are NOT the same! With an unexpected event causing the underlying to drop, you are not only hit by the price change of the underlying, but the sometimes extreme increase in Volatility! Exiting with the family jewels in tact may not be possible, but with a Covered Call, the Call becomes worthless, and the underlying may be exited as one may expect (with only the price change of the underlying to Eat). Been there done that, will not repeat.
 
You must log in or register to reply here.
Back
Top