Wouldn't bull or bear vertical spread make more sense than CC/short put in this case with capped risk?
Covered Calls
- Thread starter Blue_Bull
- Start date
Wouldn't bull or bear vertical spread make more sense than CC/short put in this case with capped risk?
I use covered calls in a 401k account (can't do spreads, buy straight calls/puts, etc). A couple of things I do to make the most of the covered call:
1) Scale in to the underlying position. I like a 50/50 or 60/40 split.
2) Sell some calls upfront and use a fairly close trailing stop to sell the remainder. If the stock bolts upward, you get the move + you can sell calls later to lock in gains (or just exit).
3) Adjust which calls you sell...downtrend => more ITM, uptrend => more OTM.
1) Scale in to the underlying position. I like a 50/50 or 60/40 split.
2) Sell some calls upfront and use a fairly close trailing stop to sell the remainder. If the stock bolts upward, you get the move + you can sell calls later to lock in gains (or just exit).
3) Adjust which calls you sell...downtrend => more ITM, uptrend => more OTM.
Just as an exercise and for your own gratification compute the return for a covered call and for a bull put spread with the same upper strike.
Then compute the maximum loss.
then ask yourself the question: why am I doing this?
Then compute the maximum loss.
then ask yourself the question: why am I doing this?
I actually prefer to trade spreads (or at least long options), however in some accounts (401k), you just aren't allowed to trade spreads. I also am part of an employee stock purchase plan (buy at 15% discount) and covered calls allow me to derive additional protection (and income) on those shares.
So while they aren't perfect, they do have their place in some instances.
So while they aren't perfect, they do have their place in some instances.
General Electric gets my vote.
MCD:
I am not a big fan of covered calls except when you cover the call with a future (when you buy a future you only need 1/5 the price of the future as 'margin')
Buy the Jan 2010 MCD SSF at 60.85 and sell the Jan 2010 55 call for 6.05.
The return is 55-(60.85 - 6.05)= 55-54.80 = $20
Required outlay is 60.85/5 = 12.17 - 6.05 = 6.12 or $612 for each 100 share unit.
20/612 = 3.26% in 37 days or 32% annualized.
Random Variable Probability of MCD > 55 = 92%
I am not a big fan of covered calls except when you cover the call with a future (when you buy a future you only need 1/5 the price of the future as 'margin')
Buy the Jan 2010 MCD SSF at 60.85 and sell the Jan 2010 55 call for 6.05.
The return is 55-(60.85 - 6.05)= 55-54.80 = $20
Required outlay is 60.85/5 = 12.17 - 6.05 = 6.12 or $612 for each 100 share unit.
20/612 = 3.26% in 37 days or 32% annualized.
Random Variable Probability of MCD > 55 = 92%
GE:
With GE at 15.66 Buy the Mar 2010 GE SSF at 15.56 and sell the Mar 2010 16 call for 0.93.
The return @ 15.66 is $93.00
Required outlay is 15.56/5 = 3.1 - 0.93 = 2.18 or $218 for each 100 share unit.
93/218 = 43% in 101 days or 154% annualized.
Random Variable Probability of GE >15.66 = 63%
If you use a lower strike call you might be called prior to the next dividend.
With GE at 15.66 Buy the Mar 2010 GE SSF at 15.56 and sell the Mar 2010 16 call for 0.93.
The return @ 15.66 is $93.00
Required outlay is 15.56/5 = 3.1 - 0.93 = 2.18 or $218 for each 100 share unit.
93/218 = 43% in 101 days or 154% annualized.
Random Variable Probability of GE >15.66 = 63%
If you use a lower strike call you might be called prior to the next dividend.
Using the SSFs is a nice alternative, but there's a few catches:
1) Very likely won't be able to do this in an IRA (I think some broker platforms would see the short call as naked, even though you are hedged with the SSF).
2) I don't use SSFs too often, but it appears the spreads are somewhat wider, especially if you get away from the near month expiration. I have only used them infrequently and that was on the front month.
3) You will have to monitor things a bit more carefully. If you are assigned early, you will actually be short the shares from the call. You are still hedged by the SSF, but I think you could be responsible for the dividend if you're not quick to cover your shares before it goes ex-dividend.
Just observations, so please correct me if I'm wrong.
1) Very likely won't be able to do this in an IRA (I think some broker platforms would see the short call as naked, even though you are hedged with the SSF).
2) I don't use SSFs too often, but it appears the spreads are somewhat wider, especially if you get away from the near month expiration. I have only used them infrequently and that was on the front month.
3) You will have to monitor things a bit more carefully. If you are assigned early, you will actually be short the shares from the call. You are still hedged by the SSF, but I think you could be responsible for the dividend if you're not quick to cover your shares before it goes ex-dividend.
Just observations, so please correct me if I'm wrong.