First time writing covered calls

[MTE]

Quote from ZEAK:

...But I would also like to acquire more shares of this stock, and mentioned selling puts to try to generate some cash while waiting to get the shares at a better price, but he was against that as well. Does anyone have a good reason why this is a bad idea?...

My guess is that he doesn't want you to trade something you do not understand, which is really good considering he's getting paid a commission so the more you trade the better he's off. I would suggest learning about options first and then if you still wanna proceed then trade all you want, but until you do so follow your broker's advice.

Quote from ZEAK:

Could you give me an example of how I would use options to hedge my stock against down moves? Would it just entail selling puts?

Thanks

The easiest way to protect a stock from a decline is to BUY puts, not sell them (selling puts increases your risk, cause you would lose money on the stock and the puts if the price continues to fall)! However, buying puts requires additonal money so some people buy puts and at the same time sell calls so that the net premium paid is zero. This way you protect your stock from the fall and it doesn require you to pay any additonal money, BUT by doing this you also give up all of the upside in the stock above the call's strike. So it's a trade off between a "free" downside protection and an upside cap.

This trade is called a collar.

 

[ZEAK]

Quote from MTE:

My guess is that he doesn't want you to trade something you do not understand, which is really good considering he's getting paid a commission so the more you trade the better he's off. I would suggest learning about options first and then if you still wanna proceed then trade all you want, but until you do so follow your broker's advice.





The easiest way to protect a stock from a decline is to BUY puts, not sell them (selling puts increases your risk, cause you would lose money on the stock and the puts if the price continues to fall)! However, buying puts requires additonal money so some people buy puts and at the same time sell calls so that the net premium paid is zero. This way you protect your stock from the fall and it doesn require you to pay any additonal money, BUT by doing this you also give up all of the upside in the stock above the call's strike. So it's a trade off between a "free" downside protection and an upside cap.

This trade is called a collar.

Thanks for that. Some good advice. I should listen to him then and learn more about options before I go running off with $$$ in my eyes.

And thanks for the info on the collar trade. I have "OPTIONS AS A STRATEGIC INVESTMENT" by Mcmillan, so, I guess I will go get stuck into it. Find out more about this collar trade.

Thanks for sharing your knowledge, good trading to you.

 

[ManhattanTrader]

Options as a strategic investment is a great book. I have it and still read it when I need to brush up on my options knowledge.

 

[yip1997]

Quote from ZEAK:

Thanks for the thoughts.

The reason I need a full service broker is, well, been with him a long time, back when all I ventured to invest in was mutual funds. He has made me money, even though his minimum comish is 150 bucks. The only time I did not make money (as much as I should have) is when I went against his advice.

His main reason for not writing calls on my holdings was that his commission is too high to make it worth while, AND the fact that I do not understand options well enough. He said that if my stock DID get called away, that is one commission, then if I wanted to buy it back I have to pay commission AGAIN. So right there, thats $300 I am out, and I dont know what the stock would be trading at, at the time I want to buy it back, so possibly more losses.

But I would also like to acquire more shares of this stock, and mentioned selling puts to try to generate some cash while waiting to get the shares at a better price, but he was against that as well. Does anyone have a good reason why this is a bad idea?

He just suggested that I continue to save my money and then when I have enough, buy the shares out right at that time.

It just seems like a waste of....my capital, to have it sitting there, going down in value (for the moment), if you know what I mean.

You are paying too high the commission to justify short-term trading. You need to find out the extra revenue (or income) generated from covered call or naked put and compare it with the commission.

What is your commission for trading options?

Some long-term stock investors like to use naked put as a strategy to buy some good long-term stocks at a lower price, but most technical traders won't do it this way.

Ask yourself what you are, a long-term value investor or a short-term techincal traders?

 

[ZEAK]

The minimum commission is $150. Steep, I know. But his long term picks have made me money.

I think I will use my little IB account to start to dabble in options. I would love to own some APPL so maybe I will try to sell puts to try to acquire some.

I am chewing through a book at the moment that spurred me to look further into options, its called "Generate thousands in cash on your stocks before buying or selling them"- by Dr.Samir Elias.

He just lays out example after example and it just SEEMS so easy to get that premium, but I know its not.

I will start small, and try to implement some of his techniques.

Cheers

 

[Eliot Hosewater]

Quote from overspool:

... If you do it right, the worst that can happen is your stock is called away from you for a profit. The downside is you might leave some money on the table and you will have to find another place to put the cash from the stock sale.

The worst that can happen is you find the next Enron or Worldcom and your stock goes to zero. Look at a P/L graph.

Stock getting called away is one of the best things that can happen in many cases. You might kick yourself for losing out on a particular stock's gain, but if you can consistently make a few percent per month you will outperform the market.

This is the wrong market to start selling covered calls, IMHO.

 

[overspool]

Quote from Eliot Hosewater:

The worst that can happen is you find the next Enron or Worldcom and your stock goes to zero. Look at a P/L graph.

I didn't find it neccessary to state the inherit risk of owning stock.

 

[semiopen]

Quote from ZEAK:


I think I will use my little IB account to start to dabble in options. I would love to own some APPL so maybe I will try to sell puts to try to acquire some.

If you sell puts you have to have enough money to buy the stock at the strike price. That means that you would need about $17,200 to cover a single short AAPL put in a cash account. If you have this kind of money at IB , some people might not call your account little. The simplest way to participate in a stock's rise is to buy a call.

The previous posts suggesting reading on the subject are very intelligent. Study synthetic positions.

 

[hdawg87]

Eliot, are you saying this is a bad market for CC's because it is going down or because you think there is capitulation and you might miss all the upside with a CC? Just interested in your reasoning behind the comment.

 

[Robert Weinstein]

Quote from ZEAK:

Could you give me an example of how I would use options to hedge my stock against down moves? Would it just entail selling puts?

Thanks

Actually it would entail selling CALLS. the selling of calls gives the other party the right to buy your stock from you at a set price.

So for example GE is trading at 35.50 a share and you own 100 shares. If you sell (write) 1 March 35 call @ 1.75 and the stock goes to 34.99 or less you will be able to keep all the option money that you received and still keep the stock. (the buyer of the call that you sold will not want to exercise(buy the stock) at 35 per share if he can buy GE on the open market for less.

That is an example of hedging your posistion. Of course if GE invents the cure of aging and goes to 100+ per share you will be exercised AT the strike price of the option. (basically the risk for writting a covered call)

I hope that helps. Please note that trading options is IMHO way more complicated than it appears on the surface. A stock can be trading at $50 monday and then again on Tuesday of the same week and you might see the SAME option ($55 Feb Call for example) trade at prices of 50 cents all the way to $2 even within the same day. As a result you can make or lose money trading options EVEN if the price of the stock does NOT move.

On a whole different note. Does your broker BEAT the SP500 by enough to justify the fees he is charging you? Its NOT enough to make you money, they should make BEYOND what the SP500 is doing or they could be free and still overcharging you. I pay less than half a cent per share when I trade and I pay a lot compared to many here.