covered options

Anyone, besides me, do a lot of "covered put" writing? (A covered put is shorting the stock and writing a put against it. )

Yes, I am aware that a covered put write is a synthetic naked call write. Accordingly, I limit my risk with a "safety net" called an out of the money long call. Because I perpetually roll my short puts, I find it a good idea to buy the calls with expirations a few months out. I regard the cost of these protective calls as insurance. Hence, when doing my trade management, I figure in the cost of my long calls on a straight line basis. That is, I divide the total cost by the days remaining to expiration to get my "insurance" cost per day.

I'm happy to loose my insurance premium, the same as I like to loose on my term llife insurance premiums, or homeowners insurance.

Any comments?

4Q (By the way, this strategy works quite well on QQQQ.)
 
Here is another view I have used. The theme here is to do covered calls or buy-writes on stock YOU WANT TO OWN. Let me give another example. Take JNJ. Buy 100 sh of JNJ and write one call one handle ITM. The only purpose of this call is downward protection PERIOD. This is not a speculative trade-it is an investment with extra protection. If it is called away, so be it--but I still make money. If the call expires worthless, so be it. The protection was worth it. Now, I can buy more JNJ if the fundies are still there. To take it a step further, I can sell puts at a level where I want to acquire JNJ, instead of placing a limit order. Point being, there are a great number of positive ways to use covered puts and calls. When I started, 1999, to use buy-writes, it did it for speculation. The call premiums were outrageously high--so I didn't care about the quality of the stock. Made a ton of money; interestingly, if I just bought the stock and held it, I would have made more. Imagine buying Qualcom at 200, and writing a 205 call, and then watching the stock go to 800.
 
Quote from jwcapital:

Imagine buying Qualcom at 200, and writing a 205 call, and then watching the stock go to 800.
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That's exactly the risk of CC's. Limited profits, "unlimited losses". Sounds backwards to me.
 
Quote from jwcapital:

Imagine buying Qualcom at 200, and writing a 205 call, and then watching the stock go to 800.
More...

This is very unrealistic scenario. You can't lose so much with the short term covered calls. The option prices are pretty efficient.
 
Covered calls, especially in this market environment are a great way to bring in money and lower the cost basis on stocks. I bought high quality tech stocks over the last 2 months and have wrote calls on all of them. Collectively I have about 7000 shares of INTC , MSFT , CSCO , YHOO and ORCL that I write options on .

I had most of my liquid assets in CD’s and Money markets when the market tanked.
 
thanks for the comments, if you take a second look at the history i gave, I actually bought another 200 shares on 11/17.
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Yep, I missed that (I don't seem to multitask too well in the AM (g) ). OK, subtract the comments about ratio writing.

Clearly, you have a handle on writing covered calls and your objectives. Pardon the redundancy but again, I'd suggest NP's instead of the simultaneous CC and if you can get past that, spreads. If you're going to limit the upside (the CC), you might as well limit (control) the downside as well (the spread) :)

Also, if you heart is set on CC writing, in more normal times, consider a slight overwrite if you write OTM's. With some moderately tight money managemment, you can improve you downside protection w/o risking much to the upside.
 
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Quote from jwcapital:

Imagine buying Qualcom at 200, and writing a 205 call, and then watching the stock go to 800.
--------------------------------------------------------------------------------

Quote from gkishot:

This is very unrealistic scenario. You can't lose so much with the short term covered calls. The option prices are pretty efficient.
More...
Give or take a few 10 or 50 points or so, that's exactly what QCOM did just before the tech bubble burst.

In re the losing thing, you can lose plenty with short term CC's unless they're very deep ITM. With a delta of less than 1.00, it's a losing battle with CC's when the underlying is dropping. And rolling them down will only soften the pain. Lower delta, B/A slippage, multiple commissions... OUCH.
 
Quote from jwcapital:

Take JNJ. Buy 100 sh of JNJ and write one call one handle ITM. The only purpose of this call is downward protection PERIOD. This is not a speculative trade-it is an investment with extra protection. If it is called away, so be it--but I still make money. If the call expires worthless, so be it. The protection was worth it. Now, I can buy more JNJ if the fundies are still there.
More...

Kindly explain what you mean by the extra protection provided by writing the ITM call.

From what I see, the only "protection" you get is a lower cost basis on the underlying due to the collection of whatever extrinsic value (premium) that call option has.

Your upside is limited to the premium collected [as if the stock rallies, your written option will definitely be excercised].

Your downside is unlimited, since you still hold the underlying (albeit with a lower cost for writing that call) but still risk losing if the stock starts to fall.

Is there something I am missing with your example?

Cheers.
 
Just to clarify...when you guys use the term "lower cost basis", you are not talking about your US income tax basis in the stock. Tax wise, let's say you buy 100 shares of Underlying (UND) for $20 per share. You also write 1 call against the stock and receive a premium of $2.

If the stock declines to below $20 at expiration, the call will expire worthless. The $2 premium will be a short term capital gain at the date of expiration. Your tax basis in the stock will still be $20.

4Q
 
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