Generating Cash Flow by Selling Calls

[alphastocks]

Quote from vhehn:

this melt up has been a time period where selling naked calls could have been painful. i would say it is a good test of your strategy. so how is it going?

I actually closed out all my positions prior to this big rally. Not because I foresaw it coming, but I needed the cash in that particular account for something else, plus I had too much on my plate.

But, yeah this market would have hurt a portfolio full of short call positions, but less than a short stock portfolio as the premium would have offset the losses somewhat.

 

[jficquette]

Quote from alphastocks:

Thank you, that is what the text books say. In the real world it is not the case. Shorting naked calls is less risky and more rewarding than shorting stocks, unless the market takes a nose dive, then the chances are that the stock shorts will outperform the call shorts.

Lets look at FDX 110 Sept Call that I shorted yesterdays at 3.30. FDX is last traded at 107.4 and if it closes anywhere below 110 by Oct 20 I make $330, which is 3% return in 1 month. In order for me to make the same 3% from shorting a stock FDX must go down to 104. Theoretical risk is one thing, the probability of the outcome is something else.

But vhehn is right that shorting options gives you limited upside and unlimited downside so it might not be appropriate for everyone, but it works very nicely for me.

Thats cuz you have been lucky. One day you going to wake up and find your underlying is up 20% on a buyout.

Better to buy otm puts on extended stocks. Buy them on a big big up day. Bid for them. Don't pay the spread.

John