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Covered Calls
- Thread starter Blue_Bull
- Start date
Quote from MTE:
Overall, you cannot have it both ways. A large stable stock with good dividends will have low premiums precisely because of those qualities.
On a side note, unless you already own the stock you are better off writing cash-secured puts than covered calls.
Why is that? Are you speaking about the dividend stocks in particular, or all stocks in general?
Quote from MTE:
Overall, you cannot have it both ways. A large stable stock with good dividends will have low premiums precisely because of those qualities.
On a side note, unless you already own the stock you are better off writing cash-secured puts than covered calls.
Yes, well, put. The dividend is already "priced into" the premium, so it makes no difference what kind of stocks you write these calls on. Very high dividend stocks usually have very low premiums.
Stocks are wily--they change their ways without notifying us. If I had a choice between collecting a decent front-month premium or waiting a quarter to get a dividend that could potentially be cut, I think that money now may be better than money later.
On the other hand, the dividend does stabilize a stock price somewhat, as was mentioned in another post, and it sounds like you want to hold these stocks for a while, so isn't that stability what you want from a covered call position?
This is only one person's numble opinion: for what you are trying to do, the "middle of the road" approach of choosing stocks with a reasonable, but not lofty, dividend, may be best. Boring stocks that have paid and increased their dividends for many years command lower premiums, but more safety. Always there are these trade-offs.
To get better premiums, you might also consider using a few somewhat riskier stocks. If this makes you nervous you can write more conservative calls (maybe ITM) against them.
Puts (but not if cash covered) are more capital efficient, and cost half the commissions. What to use really depends on whether your account is cash or margin.
Quote from drcha:
Yes, well, put. The dividend is already "priced into" the premium, so it makes no difference what kind of stocks you write these calls on. Very high dividend stocks usually have very low premiums.
Stocks are wily--they change their ways without notifying us. If I had a choice between collecting a decent front-month premium or waiting a quarter to get a dividend that could potentially be cut, I think that money now may be better than money later.
On the other hand, the dividend does stabilize a stock price somewhat, as was mentioned in another post, and it sounds like you want to hold these stocks for a while, so isn't that stability what you want from a covered call position?
This is only one person's numble opinion: for what you are trying to do, the "middle of the road" approach of choosing stocks with a reasonable, but not lofty, dividend, may be best. Boring stocks that have paid and increased their dividends for many years command lower premiums, but more safety. Always there are these trade-offs.
To get better premiums, you might also consider using a few somewhat riskier stocks. If this makes you nervous you can write more conservative calls (maybe ITM) against them.
Puts (but not if cash covered) are more capital efficient, and cost half the commissions. What to use really depends on whether your account is cash or margin.
Ok, so I have a question about selling puts (or calls) on margin... One of my friends back in the day used to brag that he'd sells tons and tons of calls and puts on "boring" stocks, knowing that he'd never get called on them.
I don't keep in touch with him much anymore, but he claimed that he was making probably over $100k/year with that strategy.
So, my question: is that a good approach? I understand that options are "risk adjusted," which suggests to me that if he earned $100k he was probably open to multiple $$$ k's worth of risk. And really, it's just a matter of time til that get's called. Opinions?
When will the dividend get priced into the premium? Is it only good for options expiring in the month of dividend payment? Will OTM options get dividend in the premium?
Quote from Blue_Bull:
Ok, so I have a question about selling puts (or calls) on margin... One of my friends back in the day used to brag that he'd sells tons and tons of calls and puts on "boring" stocks, knowing that he'd never get called on them.
I don't keep in touch with him much anymore, but he claimed that he was making probably over $100k/year with that strategy.
So, my question: is that a good approach? I understand that options are "risk adjusted," which suggests to me that if he earned $100k he was probably open to multiple $$$ k's worth of risk. And really, it's just a matter of time til that get's called. Opinions?
It works until it doesn't and you end up losing years of profits and then some.