the one thing that ends covered call seller careers is specific stock risk. you eliminate that by selling oprions on diversified instruments. stick with indexes or etfs. they are not going to 0.
Covered Calls
- Thread starter EnglishTeach
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the one thing that ends covered call seller careers is specific stock risk. you eliminate that by selling oprions on diversified instruments. stick with indexes or etfs. they are not going to 0.
Quote from diaoptions:
A long lecture isn't needed, just one sentence. Initiating a CC on newly bought stock severely caps potential gains while still exposing you to the downside.
what's stopping you from buying the stock higher if it's called away....so long as you keep the profits in the account you can make a memo of your original position (less taxes of course) and rinse and repeat......
Seeing as covered calls are exactly the same as selling puts*, the best idea is to find a trending stock with high volatility. They will sometimes collapse but the elevated volatility will more than compensate. The top IBD stocks should offer some good candidates. The best play though is to sell calls on dumpers the day they dump. For instance CMG is a perfect stock to sell calls on, but you've missed your chance.
* I once explained this to a JPM derivative salesman. He didn't believe me.
* I once explained this to a JPM derivative salesman. He didn't believe me.
LOL. How does that even work?
Anyways, a good candidate for this now is Sprint. They've broken resistance several times in the last month. Don't really know how their stock price ended up where it's at, anyways. (I've been selling puts on S for the last couple weeks with nice results.)
I ran a sim on systematic CC writing for six months. By no means a perfect example, nor the way everyone would do it, but I believe the conclusions are pertinent.
http://optionsthenakedtruth.blogspot.co.nz/search/label/the covered call project
http://optionsthenakedtruth.blogspot.co.nz/search/label/the covered call project
Good write up.. your right there is definitely nothing conservative about cover call writing.. limit risk, unlimit profit is the name of the game, not limiting profit and limiting risk... its all because people love the idea of getting some virtual paycheck by collecting small amounts of premium on large amounts of money (in relation to the credits collected) .. so they feel good about themselves for extracting a little premium out of the options market against their cash or stock position.. (same thing depending on if your selling the "cash" secured put, or selling the stock secured "covered" call..
bottom line is collecting a few percent of interest against your position to limit your upside and expose yourself naked to volatility is a BAD INVESTMENT! not that covered writes are always bad but just selling calls without respect to volatility is just shooting into the sky hoping money starts raining down.. this is a slow way to bust!
There's nothing wrong with covered call writing unless your an idiot.
If you have bought a stock with the goal of making money on an increase in price of the stock and then write covered calls on it then... that's idiotic.
If, on the other hand you have bought a stock with the object of collecting dividends on a stable stock then writing cc on that stock to enhance income is perfectly valid... and IS a very conservative strategy.
e.g.
GIS is a stable stock (beta = .05):
http://finance.yahoo.com/q/bc?t=5y&s=GIS&l=on&z=l&q=l&c=&ql=1&c=^GSPC
with a dividend of 3.4%
http://finance.yahoo.com/q?s=GIS
I can write a slightly OTM CC on GIS and get an annualized 4% on the CC giving a total return of 7.4% from dividend + CC. If called away I can write a slightly ITM put to get the stock back and commense writing calls again.
It's a perfectly viable strategy for income enhancement and one which I use all the time with stable stocks with good dividends.
To spend time conjuring up straw stock option strategies and then knocking those stratgies down is not real productive.
Choosing hgh volatility stocks like GS (beta = 1.63):
http://finance.yahoo.com/q/bc?s=GS&t=5y&l=on&z=l&q=l&c=^GSPC
and NOV (beta = 2.05):
http://finance.yahoo.com/q/bc?t=5y&l=on&z=l&q=l&p=&a=&c=^GSPC&s=NOV&ql=1
to write CC's on so you can show the CC strategy is a loser is just setting up straw men... or stocks.
I can prove anything I want by simply choosing the 'right' stock.
If you have bought a stock with the goal of making money on an increase in price of the stock and then write covered calls on it then... that's idiotic.
If, on the other hand you have bought a stock with the object of collecting dividends on a stable stock then writing cc on that stock to enhance income is perfectly valid... and IS a very conservative strategy.
e.g.
GIS is a stable stock (beta = .05):
http://finance.yahoo.com/q/bc?t=5y&s=GIS&l=on&z=l&q=l&c=&ql=1&c=^GSPC
with a dividend of 3.4%
http://finance.yahoo.com/q?s=GIS
I can write a slightly OTM CC on GIS and get an annualized 4% on the CC giving a total return of 7.4% from dividend + CC. If called away I can write a slightly ITM put to get the stock back and commense writing calls again.
It's a perfectly viable strategy for income enhancement and one which I use all the time with stable stocks with good dividends.
To spend time conjuring up straw stock option strategies and then knocking those stratgies down is not real productive.
Choosing hgh volatility stocks like GS (beta = 1.63):
http://finance.yahoo.com/q/bc?s=GS&t=5y&l=on&z=l&q=l&c=^GSPC
and NOV (beta = 2.05):
http://finance.yahoo.com/q/bc?t=5y&l=on&z=l&q=l&p=&a=&c=^GSPC&s=NOV&ql=1
to write CC's on so you can show the CC strategy is a loser is just setting up straw men... or stocks.
I can prove anything I want by simply choosing the 'right' stock.
exactly what i was saying...
But i was adding that your basically expressing the idea that the volatility baked into the calls is expensive enough to take the risk selling it.. Everything is relative.. if a volatile stocks premium is super overprice. i might think of a limited risk way to sell it..
But i was adding that your basically expressing the idea that the volatility baked into the calls is expensive enough to take the risk selling it.. Everything is relative.. if a volatile stocks premium is super overprice. i might think of a limited risk way to sell it..
danshirley
You misunderstand the intent.
The sim was to show what CC does over time across a range of circumstances, not to show it is a loser.
More specifically, it was to counter the claim that you can make 4-8% profit per month by systematically writing CCs. I stated that quite clearly and explicitly.
As also stated, I use CCs myself much in the same way as you have outlined, so go easy on the indignation there matey.
You misunderstand the intent.
The sim was to show what CC does over time across a range of circumstances, not to show it is a loser.
More specifically, it was to counter the claim that you can make 4-8% profit per month by systematically writing CCs. I stated that quite clearly and explicitly.
As also stated, I use CCs myself much in the same way as you have outlined, so go easy on the indignation there matey.