First time writing covered calls

Quote from chrismontez:

Well I guess that depends on what you think is a good return on your $. If your exit strategy was to sell your stock when it hit $30 and you can sell an ITM call that would give you an additional 10% return, I don't mind tieing up my $ at a 10% return. I've got cash sitting in accounts that pay me less than that now.
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You are making kind of an assumption. If the stock is at $30, I doubt you can find a deep ITM call for a few months that will give you a 10% additional return unless you pick and choose how you are defining that return. If you sold the stock at $30, I agree you would not make an additional 10% sittingin cash. But a deep ITM call will not give you an additional $3.00 of profit either which is the additional 10% you are comparing.

So you cannot say 10% more is gained selling a deep ITM call that is 3 or 4 months out in time.

Here is a close example. EBAY is trading at $28.17. If you sell a $20 strike call for JULY you will get 8.70 in premium or an effective sales price of $28.70. Is that extra $0.53 worth tying the money up for 5 months and capping your upside. If you sold you can take the $2,817 and invest it elsewhere. Deep ITM calls can also be construed as constructive sales so it will not work to delay a sale to get over the 1 year short-term cap gains hurdle. I used to think otherwise but was corrected.

Now you can sell the $30 JUL Call for $2.25 or perhaps the27.50 Call for $3.50 to add some more profit with ATM or OTM calls which gives you a little profit boost, but still, you wait 5 months for that extra profit while tying the money up. Would be better with those strikes then the deep ITM call in MOST cases.

Selling a deep ITM call against a stock position in most cases does not make sense except for maybe a short-term hedge. Even then a protective put still allows for upside.
 
If you are trading a fairly stable stock like ebay you are correct. I said in my original statement if the IV was high enough it can be profitable. When I was trading Tasr some years ago and IV was was 8.+% on the calls and liquidity was good, 10% return was possible. Last year I bought SGMO at $11, it ran to $19+. When it dropped $2 I sold a May $15 call for over $500. Unless my math is bad, if it gets called away I'll get $2,000 total rather than the $1700 I would have got from selling the stock. That's an extra $300 on an $1100 investment for 6 months. That is alot more than the 10% I mentioned. Now there is risk of it going down below $11, but that is something to assess before deciding to hold the stock and sell the call.

As for your suggestion of buying puts,( and I do trade puts actively), I think a strategy of buying puts everytime the stock hits your exit price is a good way to eat up the profits you would make on the trade. You buy at $20 with an exit plan at $30, then at $30 you pay $300 for a put? You've just reduced your profit by 30%. Protective puts are fine if you are an investor with no intention of selling the stock on a pullback, but we were discussing trading strategies which usually involve an entry and exit point strategy.
 
The calls are not deep in the money and there
are complexities involving possible loss of
dividends, but look at selling Ship Finance (SFL)
calls to add ~10% per year yield to the normal
8-9% SFL dividends.

Idea is to sell the May 30 calls for 0.75 (current
IB last price) and repeat selling the 3-4 month
distant options two more times per year when
SFL is over 25. If price falls to 22 or 23 sell the
25 calls. SFL stock prices is supported by
the 0.55 and slowly growing quarterly dividend.

If the stock is called away, just buy back some
time before the next dividend x date.

The idea can be enhanced by also selling 20
or 22.50 puts when SFL goes under 25 to
buy more stock to sell covered calls on.
 
Quote from chrismontez:

If you are trading a fairly stable stock like ebay you are correct. I said in my original statement if the IV was high enough it can be profitable. When I was trading Tasr some years ago and IV was was 8.+% on the calls and liquidity was good, 10% return was possible. Last year I bought SGMO at $11, it ran to $19+. When it dropped $2 I sold a May $15 call for over $500. Unless my math is bad, if it gets called away I'll get $2,000 total rather than the $1700 I would have got from selling the stock. That's an extra $300 on an $1100 investment for 6 months. That is alot more than the 10% I mentioned. Now there is risk of it going down below $11, but that is something to assess before deciding to hold the stock and sell the call.

As for your suggestion of buying puts,( and I do trade puts actively), I think a strategy of buying puts everytime the stock hits your exit price is a good way to eat up the profits you would make on the trade. You buy at $20 with an exit plan at $30, then at $30 you pay $300 for a put? You've just reduced your profit by 30%. Protective puts are fine if you are an investor with no intention of selling the stock on a pullback, but we were discussing trading strategies which usually involve an entry and exit point strategy.
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A $15 call with the stock at $17 is not really deep ITM. If you went deep ITM you would not see the high premiums you talk of since deep ITM options really do not have a big time premium value regardless of IV. We are talking apples and oranges. I do nto disagree with adding profits by selling the call but the original premise stated was doing it with deep ITM calls. One strike ITM is not usually considered deep ITM.

As for puts, again the issue is whether you want to sell or still hold but hedge most of yuor profits. If you want to sell, a deep ITM call is not going to give you much of a benefit. I think your examples are more for ATM calls which is a normal CC strategy.
 
Here is a good example. ABH trading at $21.11. JUN calls have volatility close to 100%. A JUNE $12.50 Call can be sold at $9.00 for an effective sales price of $21.50.

Vols are really high but when you go deep ITM it is irrelevant really as the vol or time premium is small. Even a $15.00 Call is priced at 7.50 for an effective price of $22.50

Look at any high vol stock you want and go deep ITM, the vol premium is negligible when you have high delta option.

If a stock hits your exit price you exit unless you have a reason to hold on.

I do not disagree with you it is just the use of deep ITM. Slightly ITM may work better for additional premiums.
 
Ok, here's a better example. Bought Nokia near $40 + and then it started to drop so I sold a Jan 09 30 sp Leap for $13. I'll get $43 if it gets called away and I am protected down to $27. Some people would have sold a far month ATM call, but then when it was down at $29 the premium received wouldn't have seen like such a good insurance to me.
 
Quote from chrismontez:

Ok, here's a better example. Bought Nokia near $40 + and then it started to drop so I sold a Jan 09 30 sp Leap for $13. I'll get $43 if it gets called away and I am protected down to $27. Some people would have sold a far month ATM call, but then when it was down at $29 the premium received wouldn't have seen like such a good insurance to me.
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You bought Nokia at $40+. What does that mean... $41? $42?... If you bought Nokia at $41 and sold a 1 year call for $13, then your sales price is $43. So you make $2.00 in a full year or 4.9%. Real numbers make the point clearer I think.

I doubt you sold the call for $13 with NOK right at $40. Let me use a real example not a hypothetical one which you keep referring to.

NOK = $36.84.
JAN09 $25 Call @ $12.80

Effectvie sales price is $37.80.

Return = 2.6%.

You cannot make a point using hypothetical numbers with respect to options. Look at the actual numbers and play around with it to see.. Deep ITM options will rarely if ever give 10% returns or else we would all be selling them and buying stock and push the price down. Why should a market maker give away money on a >+.80 delta call? Deep ITM calls cannot be sold for 10% additional returns. If you are lucky to find one, do the deep ITM CC but i think you will find it is rare.

I agree you can get the boost doing OTM or ATM calls but deep ITM calls are priced with only slight extrinsic premiums.
 
Quote from ZEAK:

I have a small stock portfolio with a full service broker. I approached him about writing some covered calls to generate income, he advised against it.

Correct. Unfortunately, your ears were filled with wax.

But I am still interested to do it...

Of course. In spite of the fact that over the long haul it will really not help you, and will drive up your commissions and complexity...

Suggestions?

Stop looking for fool's gold. There is no free lunch on Wall Street. CCs are just something that others tell you help you "get cashflow from your investments." What they DON'T tell you, is it comes at the cost of future profits.
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Ok, on Nov 8 Nokia stock opened at $40.75, I bought shortly after at $40. 20 Then didn't like what I saw and at 10:48.08 I sold a jan 09 LEAP sp 30 for $13. The stock dropped to $38.61 before closing at $40.08. I never said you should sell the call the instant you buy the stock, but it is a strategy that can be used instead of selling the stock. In this case it gave me $13 protection on a pullback and will give $278 profit if I let it run to term. I'll probably just buy it back at a lesser price due to theta on the the leap once Nokia establishes a base around $40
 
Quote from chrismontez:

Ok, on Nov 8 Nokia stock opened at $40.75, I bought shortly after at $40. 20 Then didn't like what I saw and at 10:48.08 I sold a jan 09 LEAP sp 30 for $13. The stock dropped to $38.61 before closing at $40.08. I never said you should sell the call the instant you buy the stock, but it is a strategy that can be used instead of selling the stock. In this case it gave me $13 protection on a pullback and will give $278 profit if I let it run to term. I'll probably just buy it back at a lesser price due to theta on the the leap once Nokia establishes a base around $40
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I am trying repeatedly with examples so let me use the numbers you gave me to try and illustrate.

You paid $40.20 for the stock.

Sold JAN 09 LEAP $30 Call for $13

Effective Sales Price = $43.00

Maximum Profit = $2.80.

$2.80 Profit on Cost of $40.20

=


(wait for it.....)

6.95% return.

Now that is the return from Nov 2007 to Jan 2009. So you locked in 6.95% return for 14 months. Rudimentary math back of the envelope that comes out to 5.97% annualized return.

Not quite the 10% profits you think you see. Is 5.97% annualized a good return versus a savings account, yes. A good annualized return for the stock market, not really given the risk you take for the entire time period.

Deep ITM calls are just not going to give you that much bang for your buck versus ATM or OTM calls. If you go deep ITM you have a decent hedge against a certain extent of a price drop until expiration (here from $40.20 to $30.00) which may be want you want but the annualized returns are not going to be significant for the most part.
 
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