Covered Calls

[Put_Master]

I believe selling covered calls, when used as part of a buy/write strategy is a reasonable strategy.
However, it assumes the investor is not merely chasing premium.
But rather, used as a way to select specific strike prices, specific annualized % returns, and a specific unit of time to put ones cash at risk.
In other words,... the equivalent of a put selling strategy.

Personally, when a stock is occasionally put to me, via my prefered strategy of selling puts, my objective then changes from income production, to one of "neutralizing" the trade via covered calls.
Thus, I now look for a strike UNDER the original, to sell a call on.
Sometimes it results in a break even, and sometimes a small gain or loss.

I tend to be picky, when initiating an initial trade. Both in terms of fundamental and technical analysis. Once that support has been broken, I'm not hanging around to HOPE for a recovery.
I'm now in neutralization mode via covered calls, as HOPE is not an intelligent strategy.
If another area of tech support is nearby, I'll stay with the stock, after it's been neutralized.
If not, then it's time to get as close to neutralization as possible, and put that unit of cash to work elsewhere.
I'm not married to any stock. I'm married to my money.
Bottom line,... unless used as part of a buy/write strategy, to select specific stock prices, I only use covered calls to neutralize a deal gone bad.

 

[cdcaveman]

HOPE is not an intelligent strategy.

That makes a good mission statement!

 

[cdcaveman]

no one has any experience with buy overwrites and delta hedging with buy stops? Say selling premium way out of the money more then 3 months out and and projecting future delta with gamma and vol projection, then putting in buy stops for upside risk?

 

[danshirley]

wayneL:

"More specifically, it was to counter the claim that you can make 4-8% profit per month by systematically writing CCs"

Well I don't believe that claim any more than you do, but your article doesn't counter that claim.

You chose several specific stocks without giving the method or rationale of selection of those stocks and then followed them in a fortuitus time frame. This proves nothing. It gives an EXAMPLE of your underlying belief, nothing more.

The stocks you chose, based on their beta, are not representative of any specific index of the market and COULD have been chosen with the object of proving the conclusion you ended up with. Thus my reference to straw men.

Frankly, I have never seen the claims that you refer to, but If I were the people selling that service I would simply counter with the claim that MY SECRET, which I will sell to you for a zillion bucks, will tell you how to select stocks such that they WILL give you the 4-8% per month. Against that claim you article, with its unspecified stock selection, proves nothing... other than YOU can choose stocks that will fail that ambition... and we probably shouldn't buy YOUR CC service.

I am sure that, given a few hours, I could find (in retrospect of course) four or five stocks that would show the opposite result to yours in the same time frame. So what?

 

[cdcaveman]

Quote from danshirley:

wayneL:

"More specifically, it was to counter the claim that you can make 4-8% profit per month by systematically writing CCs"

Well I don't believe that claim any more than you do, but your article doesn't counter that claim.

You chose several specific stocks without giving the method or rationale of selection of those stocks and then followed them in a fortuitus time frame. This proves nothing. It gives an EXAMPLE of your underlying belief, nothing more.

The stocks you chose, based on their beta, are not representative of any specific index of the market and COULD have been chosen with the object of proving the conclusion you ended up with. Thus my reference to straw men.

Frankly, I have never seen the claims that you refer to, but If I were the people selling that service I would simply counter with the claim that MY SECRET, which I will sell to you for a zillion bucks, will tell you how to select stocks such that they WILL give you the 4-8% per month. Against that claim you article, with its unspecified stock selection, proves nothing... other than YOU can choose stocks that will fail that ambition... and we probably shouldn't buy YOUR CC service.

I am sure that, given a few hours, I could find (in retrospect of course) four or five stocks that would show the opposite result to yours in the same time frame. So what?

i didn't know anyone was selling anything.. i kinda figured the guy was trying to disprove the alchemy of such high returns on covered call writing.. Anyone selling any ideas aren't making enough money on them! haha thats what i say!

 

[wayneL]

Quote from danshirley:

wayneL:

"More specifically, it was to counter the claim that you can make 4-8% profit per month by systematically writing CCs"

Well I don't believe that claim any more than you do, but your article doesn't counter that claim.

It is an example in real time that sans a being able to see into the future, shows an equity curve in progress.

The opportunity is there for anyone to discredit my conclusions with real time numbers.

Once again I point out that I like the strategy and use it in certain circumstances.

You chose several specific stocks without giving the method or rationale of selection of those stocks and then followed them in a fortuitus time frame. This proves nothing. It gives an EXAMPLE of your underlying belief, nothing more.

There was no special method of selecting stocks, call it random if you will.

As far as what it proves; my conclusions were:

1/ the strategy is best in sideways markets.
2/ they undeperform the underlying in strong uptrends
3/ they outperform the underlying in downtrends without necessarily being profitable.

No surprises there, the payoff diagram shows that.

If my underlying belief is wrong, I will stand to be corrected and await for someone to do so.

The stocks you chose, based on their beta, are not representative of any specific index of the market and COULD have been chosen with the object of proving the conclusion you ended up with. Thus my reference to straw men.

I don't believe beta is a game changer, because of the relationship between implied volatility and realized volatility

Frankly, I have never seen the claims that you refer to, but If I were the people selling that service I would simply counter with the claim that MY SECRET, which I will sell to you for a zillion bucks, will tell you how to select stocks such that they WILL give you the 4-8% per month. Against that claim you article, with its unspecified stock selection, proves nothing... other than YOU can choose stocks that will fail that ambition... and we probably shouldn't buy YOUR CC service.

1/ Perhaps it is a peculiarly antipodean phenomenon, these claims of outsized returns, but I strongly doubt it.

2/ Of course they will make those claims; and noobie muppets will eat it up and throw cash at the sheisters. But that doesn't stop me trying to show a more real world picture.

3/ I am not trying to sell a CC service. In the unlikely occurrence that I ever did try to sell some sort of an education program, I would attempt to give people the tools to logic these things out for themselves.

I am sure that, given a few hours, I could find (in retrospect of course) four or five stocks that would show the opposite result to yours in the same time frame. So what?

And there's the rub. My example was not in retrospect. It unfolded over months as the market did what it will.

My hope is that people have the brains to discern the difference between trading the hard right edge and data mining disingenuous bullshit.

That's all I've tried to do cobber; I fail to understand why you find that so offensive. *shruggs*

 

[cdcaveman]

Im not offended... glad your not selling anything.... covered overwrites anyone? anyone actively managing short vol dynamically hedged negative gamma trades?

 

[newwurldmn]

There is lots of evidence that covered calls outperform a buy and hold strategy over the long term before taxes and transaction costs are accounted.

Covered calls are not an absolute return strategy. If you are an absolute return guy then this is not the strategy for you. If you are a buy and hold or long only guy then this is a viable strategy.

The "unlimited" downside vs upside risk isn't relevant as you are willing to take the unlimited downside risk in your long only portfolio. Volatility doesn't matter because vega is a small risk relative to the delta. Greeks isn't as important as you aren't monetizing the gamma.

The question for the investor is if he is getting compensated enough in option premium for the rally potential of the underlying.

 

[danshirley]

Here's a little reading for you:

BXM:

The CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. Announced in April 2002, the BXM Index was developed by the CBOE in cooperation with Standard & Poor's. To help in the development of the BXM Index, the CBOE commissioned Professor Robert Whaley to compile and analyze
relevant data from the time period from June 1988 through December 2001. Data on daily BXM prices now is available from June 30, 1986, to the present time (see below). The BXM is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term
S&P 500 Index (SPXSM) "covered" call option, generally on the third Friday of each month. The SPX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The SPX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written.
Please visit the BXM FAQ for more information about the construction of the index.

So how does the whole S&P 500 (not selected stocks) perform over 5 years with and without CC??

http://finance.yahoo.com/q/bc?t=5y&s=^BXM&l=on&z=l&q=l&c=&ql=1&c=^GSPC

What is that blue line on top???

http://www.marketoracle.co.uk/Article33829.html


http://www.fool.com/investing/options/2010/12/06/better-than-buy-and-hold.aspx

Before stating 'facts' do a little research

e.g.

http://www.google.com/#sclient=psy-...w.,cf.osb&fp=7f8b389cb9285166&biw=893&bih=557

BTW:

cobber??
matey??
Antipodes??

Are you by any chance Australian??? Sounds very provincial to an American.

 

[HurricaneUS]

Quote from danshirley:

Here's a little reading for you:

BXM:

The CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. Announced in April 2002, the BXM Index was developed by the CBOE in cooperation with Standard & Poor's. To help in the development of the BXM Index, the CBOE commissioned Professor Robert Whaley to compile and analyze
relevant data from the time period from June 1988 through December 2001. Data on daily BXM prices now is available from June 30, 1986, to the present time (see below). The BXM is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term
S&P 500 Index (SPXSM) "covered" call option, generally on the third Friday of each month. The SPX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The SPX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written.
Please visit the BXM FAQ for more information about the construction of the index.

So how does the whole S&P 500 (not selected stocks) perform over 5 years with and without CC??

http://finance.yahoo.com/q/bc?t=5y&s=^BXM&l=on&z=l&q=l&c=&ql=1&c=^GSPC

Click the "max" link from the above link and you'll also see that the S&P roughly outperformed the Buy/Write strategy up until 2008. At best, it's inconclusive....