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covered options
- Thread starter ptrjon
- Start date
I like to write covered call with leaps against quality, high dividend stock. In the past, I used MO (Altria). Suppose I owned the stock in January, 2006. I would write a Jan 2007 call about two handles OTM. I look at the premium as an "extra" dividend. If the shares go above the strike, I make about a 10% capital gain. If the option expires, I would write another one (Jan 2008--as above criteria). If the stock dips to a more desirable point, I buy more shares (assuming the fundies are still good) and sell another call. Obviously, if the stock plummets (like everything else this year), you have paper loss. A company like MO (now PM) has good fundies and people will always smoke. So, any drop always looks like a buy. This is just an example of how I use short calls. I did end up selling the stock in Jan 2008--just too chicken to hold. I know that I can always get in again.
jwc, you see the light. covered calls are are a very effective way to add to dividend yield.
Quote from xflat2186:
Where is the profit in this trade? If the call was deep in the money there was then no time premium in it to collect. If C went up the call which was deep would move against your stock... thats a push. C went down the call moved with the stock down thats a push.
Bottom line covered call sellers mostly got slaughtered in 2008 since the part they covered fell a lot more than the premiums they took in.. aka naked puts
If the option expired in the money, and I had the shares called away, I would have netted about 5% net gain from the position.
C has fairly high options premiums.
Well C spent most of September below 20 bucks, in order for you to net 5% on an option which there are not a whole lot of December options to choose from. Also although volatility in C was high it didnât explode until after September. SO basically you needed to sell 3 month, in the money call with at least a dollar of premium over parity and also have that strike finish out of the money after the stock fall. I donât feel like looking up the price range on the couple of strikes which this had a tiny chance of occurring but I seriously doubt it.
Youâre generally not writing deep calls vs long stock and netting 5% even if the stock gets called on expiration on a 3 month basis.
Like I have and many others have said here over the years, covered calls is a strategy with considerable risk. Sure you can make money on the options side, you just lose it on the stock side.
Youâre generally not writing deep calls vs long stock and netting 5% even if the stock gets called on expiration on a 3 month basis.
Like I have and many others have said here over the years, covered calls is a strategy with considerable risk. Sure you can make money on the options side, you just lose it on the stock side.
Quote from xflat2186:
Well C spent most of September below 20 bucks, in order for you to net 5% on an option which there are not a whole lot of December options to choose from. Also although volatility in C was high it didnât explode until after September. SO basically you needed to sell 3 month, in the money call with at least a dollar of premium over parity and also have that strike finish out of the money after the stock fall. I donât feel like looking up the price range on the couple of strikes which this had a tiny chance of occurring but I seriously doubt it.
Youâre generally not writing deep calls vs long stock and netting 5% even if the stock gets called on expiration on a 3 month basis.
Like I have and many others have said here over the years, covered calls is a strategy with considerable risk. Sure you can make money on the options side, you just lose it on the stock side.
very true, I'll give the history on C despite it being the dog of my portfolio.
11/6 400 C at 12.03
11/6 -4 10 Nov call at 2.41 (.38 per share premium)
11/17 200 C at 9.28
11/17 - 2 Dec 7.50 call at 2.71 (.93 per share premium)
11/24 -4 Dec 7.50 call at .57
all these options expired worthless.
+1734 on the options
-2708 on the stock
-974 net thus far.
I'm still long on C waiting to write my next options for January- hoping for a comeback.
When C dropped to 12, and to 9.50, I honestly thought they were good buying opportunities. I've prevented a lot of loss through this strategy, but still maintain a loss.
I believe this stock is undervalued and will recover within a year to my buying price. Until then, I'll continue writing out-of-the money options cautiously, and look for growth more than options income in the near future.
thoughts?
Your risk comparisons make no sense. A covered call is less risky than a naked call? I suppose that's so if you think that zero limits a stock's downward loss but can result in infinite losses for a naked call since there's no upside limit.It's a general statement that's generally correct. A covered call is definitely less risky than a naked call. A covered put is definitely less risky than a naked put. A covered call on a stock is also less risky(downside risk) than being long on the stock without the call.
And "A covered put is definitely less risky than a naked put?" A naked put is a covered call so covered puts are less risky than covered calls? They're just mirror images of each other, profiting (and losing) in opposite directions).
What people are trying to tell you is that the strategy has significant risk with limited reward. If that's acceptable and you're seeking income, you can achieve it with less risk (spreads). And if covered call writing is your game and only game, at least write naked puts (on a 1:1 basis with no leverage) and save on commissions and slippage. Plus, it's physically and psychologically easier to deal with closing a single leg (the NP) rather than a 2 legged CC.
Congratulations on reducing diminishing your loss on C as it fell apart, Good job! But it appears that yoy carried 2 naked calls in December as you ratio wrote 6 calls against your 400 shares. Yes?11/6 400 C at 12.03
11/6 -4 10 Nov call at 2.41 (.38 per share premium)
11/17 200 C at 9.28
11/17 - 2 Dec 7.50 call at 2.71 (.93 per share premium)
11/24 -4 Dec 7.50 call at .57
all these options expired worthless.
+1734 on the options
-2708 on the stock
-974 net thus far.
If so, then you left the so called low riisk profile of covered calls and dabbled in the higher risk area of ratio writing. Yes?
FWIW, I think that it's a Pyrrhic victory when ITM CC's expire worthless.
thanks for the comments, if you take a second look at the history i gave, I actually bought another 200 shares on 11/17.
Also, indeed I did not want these options to expire worthless, I buy them for downside protection, and my hope is to roll them out every month, unless the appreciation in the stock is too great and then i would let the stock get called away.
Also, indeed I did not want these options to expire worthless, I buy them for downside protection, and my hope is to roll them out every month, unless the appreciation in the stock is too great and then i would let the stock get called away.