Covered Calls During Rising Markets

Q

Quant Dracula

Hello gentlemen,

What are some ideas on dealing with covered call positions during rising markets?

I've backtested to 2003 a myriad of strategies via Bloomberg and found lukewarm results. They included a delta roll version and also a version applying a volatility filter and only selling options during periods of elevated vol 25%+.

I'm curious whether anyone here has any suggestions on dealing with covered calls ex-ante during bull markets.
 
Robert Morse said:
I would think that max profit is not an issue. You can close or roll. The better question is what do you do in a falling market with a portfolio of buy-writes?
More...

That's not a better question to me, to me the better question is the one that interested me and i took the time to ask.
 
Quant Dracula said:
Hello gentlemen,

What are some ideas on dealing with covered call positions during rising markets?

I've backtested to 2003 a myriad of strategies via Bloomberg and found lukewarm results. They included a delta roll version and also a version applying a volatility filter and only selling options during periods of elevated vol 25%+.

I'm curious whether anyone here has any suggestions on dealing with covered calls ex-ante during bull markets.
More...

It would seem that in a rising market, you would underperform buy and hold since your profit is capped per position and it would be harder to find high vols if market kept rising depending on whether you are talking about buy write on index or individual stocks.
 
El OchoCinco said:
It would seem that in a rising market, you would underperform buy and hold since your profit is capped per position and it would be harder to find high vols if market kept rising depending on whether you are talking about buy write on index or individual stocks.
More...
Agree. If the market is going up monotonically, buying the underlying is usually better than covered calls. The law of average works against me:

A perfectly hedged one call-write contract is to write then buy delta*100 shares, dynamically hedged. You will be guaranteed a risk free rate of return. Assuming the underlying appreciate at x%, your covered call return = (1-delta)*x% + delta*(risk free rate)%. It will always be less than the underlying rate of return, assuming the underlying returns higher than the risk free rate (in a generally up market for the underlying). So, on average, all covered calls will return less than the underlying in a up market.

The one way I know to beat the underlying is if I can perfectly time the underlying price movement and write at a strike that always expires just below the underlying. Perhaps, selling at OTM just under the underlying's standard deviation will net you a higher return but I don't know how to calculate that. Perhaps someone else can comment and help us out.
 
The funny thing with rising markets, they will eventually retrace. IMO nothing wrong with taking profits, especially with otm covered call. You can always get back in by writing otm put. If it continues to rise, there's always another stock to pick. Or continue the play on the same stock with a synthetic long. Hind sight is 20/20 but you can't lose money by taking profits.
 
Here is my problem with a buy-write strategy.

I have to take the time and effort to choose a portfolio of stocks that I have reason to believe will provide excess returns in the future. If I'm a great stock picker, I want to be paid when I'm right to make up for the ones where I'm wrong. Buy-writes cap my gains when I'm right and provide little protection when I'm wrong. I don't think the math works well over the test of time vs just a long portfolio of the same securities, IMO.
 
You must log in or register to reply here.
Back
Top