Option comprehension is definitely a loose concept Big D land. Do a web search or read an option book. Alternatively, for the aforementioned equivalent positions suggested by several, on any given day, note the real time prices of any position that your little understanding-less heart desires. Do the same on the later date when you add the 2nd leg. Add em all up and Voila!, you'll still tell us that A is B and B is A and never the two shall me.
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How much do you have to know?
- Thread starter gritsking
- Start date
Best post I have seen for a long while.Quote from filter_sweep:
As mentioned by others, a covered call is the synthetic equivalent of a short naked put, and has the same risk/reward profile. The fact that the stock pays a dividend makes no difference⦠itâs priced into the cost of the put you are synthetically selling. If it were not so you could get free money by arbitraging between the covered call and the put, and all the free money is already arbed out of the market.
Selling naked puts that are fully secured by cash is a good strategy for grinding markets, particularly if you can manage to sell them on pullbacks. However, as mentioned, you will significantly underperform during wild bull runs and you can expect significant drawdownâs during bear markets.
Itâs funny, I remember covered calls and selling verticals/iron condors was all the rage back in â04 through early â07, as though everyone had forgotten what happened in 2000-2002. Anyone blindly employing those strategies during â08 and â09 would have been murdered, giving back everything they had made during the good years and then some. Here we are a couple years later and everyone has a short memory⦠everyoneâs talking about selling premium again. Itâs amazing how quickly we forget and forgive⦠even Spitzer has his own TV show now, crazy world we live in!
People talking about covered calls like its the reinvented holy cow. Like every other strategy that works - its time limited.
Everything works until it fails.
When people think some things are 'smarter' doing than others, I start to wonder what they think about their counterpart. Are they idiots? Most likely not!
Is the OP still around?
We are pretty nice here on the options forum. The arguments tend to be gentlemanly. It's those economics people that need rabies shots.
Yes, you can do quite well with this method. It is not a bad method for those of us who do not want to sit in front of the screen. Part of the bad reputation of these methods is that they tend to be the first trades of beginners, who continue to trade them no matter what, and sometimes get killed. But you don't have to do that--instead you can do two things:
1. Covered calls and naked puts are like your best pair of shoes: only wear them during nice weather. Pair this strategy with some kind of market timing system. You can use IBD, VectorVest, MTRIG, or anybody else's system, or make up your own using a simple long-term MA on an index. Get out of stocks when your signal fires. Then you will not have to worry about stuff like 2008. There will still be flash crashes and other unpredictable things, but you will not have these 30-50% drops.
2. Set a mental stop on these positions: 10% below breakeven, or whatever seems reasonable to you. If one stock is acting badly, why deal in it? If all stocks are acting badly, you may find yourself exiting all of your positions one at a time, and having few options left to buy back when your "down" signal happens--not a bad thing. You can go back and sell your covered calls or puts again some other time--the big dividend payers and dividend raisers are not going anywhere.
One person mentioned the necessity of limit orders. You can use huge stocks. Their option bid-ask spreads are not such an issue. Some of my favorites that tend to have decent premiums are defense stocks, semiconductors, oil, insurance, and some food and beverage stocks.
If you are selling CCs, I agree with letting them get called away (or exiting the position when there is no time value left). If you still like the stock, you can buy it back on a down day. You are either owning stocks, or you are selling CCs. One has to make up one's mind. The equivalent can be done for puts, unless you are using them to buy stock.
We are pretty nice here on the options forum. The arguments tend to be gentlemanly. It's those economics people that need rabies shots.
Yes, you can do quite well with this method. It is not a bad method for those of us who do not want to sit in front of the screen. Part of the bad reputation of these methods is that they tend to be the first trades of beginners, who continue to trade them no matter what, and sometimes get killed. But you don't have to do that--instead you can do two things:
1. Covered calls and naked puts are like your best pair of shoes: only wear them during nice weather. Pair this strategy with some kind of market timing system. You can use IBD, VectorVest, MTRIG, or anybody else's system, or make up your own using a simple long-term MA on an index. Get out of stocks when your signal fires. Then you will not have to worry about stuff like 2008. There will still be flash crashes and other unpredictable things, but you will not have these 30-50% drops.
2. Set a mental stop on these positions: 10% below breakeven, or whatever seems reasonable to you. If one stock is acting badly, why deal in it? If all stocks are acting badly, you may find yourself exiting all of your positions one at a time, and having few options left to buy back when your "down" signal happens--not a bad thing. You can go back and sell your covered calls or puts again some other time--the big dividend payers and dividend raisers are not going anywhere.
One person mentioned the necessity of limit orders. You can use huge stocks. Their option bid-ask spreads are not such an issue. Some of my favorites that tend to have decent premiums are defense stocks, semiconductors, oil, insurance, and some food and beverage stocks.
If you are selling CCs, I agree with letting them get called away (or exiting the position when there is no time value left). If you still like the stock, you can buy it back on a down day. You are either owning stocks, or you are selling CCs. One has to make up one's mind. The equivalent can be done for puts, unless you are using them to buy stock.
Quote from Random.Capital:
To replicate intermittent use of CC, you go long the underlying when you don't want to be covered, you sell the underlying and short the puts when you do.
Well, that's completely different than what the option weenies were saying up to this point, but yes that would work. You could exchange one trade in the underlying and one trade in a more liquid option for two trades in the underlying and one trade in a less liquid option. I don't see why anyone would WANT to do that barring an arbitragable pricing situation on the options, but you could do it.
I didn't say anything different than what the other "weenies" said. It seems to me you're making inappropriately pedantic interpretations of their posts. Someone who is holding only the underlying is obviously not in a CC and there is therefore nothing to replicate.
Nor did I suggest naked puts were preferable to CCs - merely pointed out they have the same risk - so if someone isn't comfortable selling naked puts they by definition can't be comfortable doing CCs.
Nor did I suggest naked puts were preferable to CCs - merely pointed out they have the same risk - so if someone isn't comfortable selling naked puts they by definition can't be comfortable doing CCs.
Upon receiving entry signals from my model, I used to sell puts to enter a position and then hold until expiration or excercise. If exercised, I would then turn around and sell a covered call. However, over the last eight years I have evolved to purchasing the underlying directly (bypassing the entry sell to open put) and then wait for an optimal time to sell covered calls. By doing so, I create a no-lose situation because I make money whether the option expires or is exercised. (Capital losses on the underlying are compensated with the gain in the premium from the call option as well as uncorrelated instruments also producing a gain).
I have come to view option selling as an essential component of portfolio management because markets tend to move sideways most of the time. I can position myself to make money when markets rise or fall, but the inherent time decay permits us to make money when not much is happening, to include non-trading days such as weekends and holidays). "Putting" this time to work for your benefit can provide a very steady source of income.
A friend once told me that making money is like catching rain drops in a bucket...eventually with enough rain drops, the bucket fills up. Well, option selling is one of those rain drops. Dividends are another. Investing in non-correlated instruments is yet another. There are others. By using this multi-prong approach (do not rely solely on one method alone), I see my balance growing steadily with a greater resilience to large moves.
Best of luck to you.
I have come to view option selling as an essential component of portfolio management because markets tend to move sideways most of the time. I can position myself to make money when markets rise or fall, but the inherent time decay permits us to make money when not much is happening, to include non-trading days such as weekends and holidays). "Putting" this time to work for your benefit can provide a very steady source of income.
A friend once told me that making money is like catching rain drops in a bucket...eventually with enough rain drops, the bucket fills up. Well, option selling is one of those rain drops. Dividends are another. Investing in non-correlated instruments is yet another. There are others. By using this multi-prong approach (do not rely solely on one method alone), I see my balance growing steadily with a greater resilience to large moves.
Best of luck to you.
Quote from The Big D:
Yes you did - owning puts AND the underlying is different than owning just puts.
However, you HAVE proved that you can't read any better than the other weenies.
Sorry Big D, Gonna have to side with the other guys on this one. It seems that you are actually the one who is missing the critical points here, and it is quite evident that you don't in fact understand things as well as you claim to.
I do understand what you are trying to say, I think. But there is really no scenario where you cannot exactly mimic the long stock/CC situation with short puts and long calls.
The problem comes in the fact that a synthetic long stock created by a short put/long call must be rolled out each month. This will add additional commissions into the mix, as well as more taxes. Generally too, the slippage is higher when trying to get into two option legs vs generally minimal slippage when purchasing stock.
So there are drawbacks to replicating the long stock outright, but the opposite is also true when trying to replicate the CC via a simple short put. Again, one transaction instead of two.
The point you seem to be missing in your comments about not knowing the future, is that when you replicate a CC via short puts, you don't need to know the future. Whatever call strike/month you would use to create the CC, that is the one you use to create the put synthetic. If you use the front month, then sure the puts will expire, leaving you with nothing, and you'll have to immediately open the position in a future month, but you would be doing the same thing to open the CC again.
In reality, the tax advantage is the single biggest advantage to the traditional CC vs the Naked Put. Everything else can be exactly replicated.
Quote from drcha:
Is the OP still around?
We are pretty nice here on the options forum. The arguments tend to be gentlemanly. It's those economics people that need rabies shots.
Yes, you can do quite well with this method. It is not a bad method for those of us who do not want to sit in front of the screen. Part of the bad reputation of these methods is that they tend to be the first trades of beginners, who continue to trade them no matter what, and sometimes get killed. But you don't have to do that--instead you can do two things:
1. Covered calls and naked puts are like your best pair of shoes: only wear them during nice weather. Pair this strategy with some kind of market timing system. You can use IBD, VectorVest, MTRIG, or anybody else's system, or make up your own using a simple long-term MA on an index. Get out of stocks when your signal fires. Then you will not have to worry about stuff like 2008. There will still be flash crashes and other unpredictable things, but you will not have these 30-50% drops.
2. Set a mental stop on these positions: 10% below breakeven, or whatever seems reasonable to you. If one stock is acting badly, why deal in it? If all stocks are acting badly, you may find yourself exiting all of your positions one at a time, and having few options left to buy back when your "down" signal happens--not a bad thing. You can go back and sell your covered calls or puts again some other time--the big dividend payers and dividend raisers are not going anywhere.
One person mentioned the necessity of limit orders. You can use huge stocks. Their option bid-ask spreads are not such an issue. Some of my favorites that tend to have decent premiums are defense stocks, semiconductors, oil, insurance, and some food and beverage stocks.
If you are selling CCs, I agree with letting them get called away (or exiting the position when there is no time value left). If you still like the stock, you can buy it back on a down day. You are either owning stocks, or you are selling CCs. One has to make up one's mind. The equivalent can be done for puts, unless you are using them to buy stock.
I actually think the best version of a CC strat is the buy-n-hold Joe Sixpack investing only in the broader index like SPY. IOW, the guy who isn't going to sell the underlying regardless of what it does. Rain or shine, he just keeps adding to it every month. This is the ideal way for him to smooth out the equity curve. he isn't really capable of employing any other tactic, but this one is easy and takes very little knowledge.