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
I'm happy with my strategy and look forward to refining it. Thanks for your inputSo you want to hold the stock long term but cap any gains to the difference between your sold call strike price and the current price of the stock plus premium received, but make sure you are exposed to any large decline minus the premium received. Do I have that correct?
If so, you are on the right track, but I'd still just sell naked puts.
That was my thinking when I started trading options, doing covered calls. Didn't work out well because:Thanks JackRab. That is exactly right. My plan is to hold onto the stock and sell OTM calls. If I called out, so be it. It's a nice profit. Ideally, I add income to the holding.
The conversation got diverted. Thanks for bringing it back on track!
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:
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.
There is zero difference between a naked put and a covered call. Both have exactly the same risk profile, and if your broker allows you to write naked options there is zero reason to bother buying the underlying and holding it. It costs more in terms of commission and it offers no benefits.
If you sold a naked put and the stock price drops, you can:
a) Let it go and end up being assigned shares.
b) Short the stock before it reaches the strike, thus converting your position into a covered put with limited downside and unlimited upside risk.
c) Roll the option to a future date, to a lower strike...or to the same strike as you'll collect some additional premium .
Makes no sense! If you're doing covered anything, you are capping potential gains in exchange for option premium. CC is the old man's strategy. You buy something boring and hold it, usually a dividend stock, and write OTM monthly calls. If you want to do it as a short-term trading strategy it's always better to go with naked options.
I wouldn't say selling puts is strictly better than covered calls. They are equivalent in terms of valuation but not in terms of taxes and transaction costs.
For example, if you can get qualified dividend treatment on an underlying it behooves you to do the covered call. You will save on the dividend taxable portion of your pnl. If you are selling upside options and the stock constantly stays under your strike (as you continue to roll up) then you can defer taxable events and realize long term capital gains on that portion of the position.
If you are trading OTM calls (ITM puts), you might realize better transaction slippage.
Additionally, if you expect your call to not be called away (and your put to be called away) you can actually reduce your commissions because you will have 13 transactions a year (1 stock, 12 options) vs 24 (12 puts and 12 assignments).
In hard to borrow names, if the underlying starts to selloff, it might be difficult to close or hedge the position.
However, there are times when selling puts is better:
Covered calls use up balanesheet, where it's unlikely you fund better than the OCC implied rates.
Covered calls are more likely to be early exercised against you vs puts which can increase your transaction costs and require a little more bookkeeping - in dividend paying stocks where you are selling downside options.
If the cost of borrowing the shares is high, the market will assume all holders of the stock can receive the borrow cost (as a dividend). It's hard for retail to get a fair rate on the borrow of his stock.
I wouldn't say selling puts is strictly better than covered calls. They are equivalent in terms of valuation but not in terms of taxes and transaction costs.
For example, if you can get qualified dividend treatment on an underlying it behooves you to do the covered call. You will save on the dividend taxable portion of your pnl. If you are selling upside options and the stock constantly stays under your strike (as you continue to roll up) then you can defer taxable events and realize long term capital gains on that portion of the position.
Additionally, if you expect your call to not be called away (and your put to be called away) you can actually reduce your commissions because you will have 13 transactions a year (1 stock, 12 options) vs 24 (12 puts and 12 assignments).
In hard to borrow names, if the underlying starts to selloff, it might be difficult to close or hedge the position.
Covered calls are more likely to be early exercised against you vs puts which can increase your transaction costs and require a little more bookkeeping - in dividend paying stocks where you are selling downside options.
Correct. It's far cheaper to write puts than it is to buy a stock, sell a call and then pay margin interest on the stock plus additional commissions if your stock is called away. By selling puts you can avoid assignment quite easily by choosing a strike >1 STD deviation away from current price or by using EMA/SMA lines to minimize possibility of assignment.
If you're paying taxes, you're making money...and that latter part is the most important part. Taxation is the least concerning issue on my mind and it should never be a "guiding principle" in any trading or investing strategy.
No, not really. We're assuming a mirror strategy with the only difference being writing puts vs buying stock and writing calls against it. Covered calls will ALWAYS be more expensive in terms of transaction fees. In either situation you can choose strikes with lower probabilities of assignment if you want to avoid it. It's far easier to manage a naked put than a covered call - with a naked put you can roll it anywhere you want.
This would be a larger problem with a covered call than a naked put, because if it starts to sell off, you can short shares to protect your naked put by making it into a covered put. If you were sitting in a covered call and it starts to go against you, you'll probably take a greater loss on the shares than you'll earn from the premium - and you'll have to close both the stock position and the short option position.
That's not an accurate statement. If the stock makes a sudden move in either direction you'll be assigned if you are short on that side of the options chain. Covered calls is a terribly clumsy method for short term trading, and so people who use it appropriately are buy-and-hold types writing calls on low volatility stocks...so the chance of a surprise move is very low, and the probability of a move one way or the other is about the same.
There's a lot of strawman arguments here.
If your 1 STD deviation rule means you never lose money marked to market you have found an arbitrage.
Taxes can be different between two economically similar strategies - an obvious example is short term trading of SPY vs ES futures.
If you are selling an upside strike, an ITM put (especially on a dividend paying stock) will probably have more slippage than stock + a short call. There is little appetite by market makers to enter into dividend exposure.
In your example it's always easier to sell long than to sell short - and with certain circuit breakers, you can't even short at all. And as you said in an earlier post, if you lose on a covered call, you will lose the same on a short put as they are economically equivalent.
I was referring to early exercise where there is virtually no reason to ever early exercise a put (some high interest rate situations are exceptions) but there are lots of times to early exercise a call.
There's no straw men, unless you call simple logic a "straw man". Standard deviation is not a rule, it's just an estimation of how likely a stock is to hit a certain price according to the probabilities outlined by normal distribution. You'd have to calculate what 1 std deviation is yourself on the particular stock/etf as well as how far in the future you want to go.
Not sure what this "slippage" is that you keep talking about. It's not relevant to your example. On options with high volume you'll get the price that's the midpoint between bid/ask in most cases. If you are buying the stock and writing the call in the same transaction, your trading program will let you choose a limit price to buy at, so put in an order that's below the midpoint and work your way up until you get a fill.
If a stock was expected to make a move upwards, implied volatility on the call side would rise thus making call premium higher. In that case you could make a little more profit by choosing a covered call, but the flipside is also true. A stock that is expected to fall sharply will have IV inflated on the put side, substantially increasing premium values.
The risk curve is identical; the management possibilities of a naked put are far more flexible than a covered call. Like I said, you can make a naked put into a covered put just by shorting the stock. If shorting is not allowed, you can buy a future dated option to turn it into a credit spread.
I write high volume, high OI options all the time and I can count the times I've been early-exercised on one hand. There are very few reasons to exercise an option early, whether call or put.