if you're writing covered calls, do you always do a far away expiry?

[stoic]

Quote from 1a2b3cppp:

I know that it depends on the relative prices. I'm asking if it's safe to say that, generally speaking, as time goes on and price goes down below the strike price of an OTM call, the value of the option tends to go down as well.



I don't know what that means.


Free shareware calculator???

Yes as time goes by the option decline. The Jan. 60s for 2012 are more because they have more time, thus more time value.

Unwind the position. Buy to close the option and sell the underlying.

Free Shareware calculator???

No. The program will do the calculations for over 40 different strategies, plus a naked option margin calculator, a BSM & BOPM option price models and a calculator for adjusted non-standard options. It was worth what I paid. (and then some)

 

[nazzdack]

Quote from tradingjournals:
----sequence of trading....
----sell it first....

1) He, the initiating poster, is doing a covered-write. Therefore, he's initiating the option position on the short-side of the market.
2) To "write" an option is slang for initiating a short-sale.

 

[spindr0]

Quote from 1a2b3cppp:

Well yeah, but if price moves down and away from a call's strike price, wouldn't it tend to go down? Doesn't selling calls put time decay on your side anyway? I would assume that as time goes on, there is less chance that the stirke price will be met and therefore the price of the option would go down.

Basically I want to be able to be able to get out of the original covered call (without taking a loss) and write a new covered call for a lower price in the event that the price of the underlying goes down.

In isolation, decreased price will lower the call premium. 3 major things affect the option's price - time decay, change in price and change in IV. Just because one and sometimes two of these move in your favor, it does not guarantee that the option will move in your favor.

 

[TheGoonior]

Covered calls work best in slowly rising (or slowly falling) markets, so you need to make sure you are careful to match the tool to the job.

I use covered calls a lot in an IRA where I don't have the approval for spreads and I normally sell the front month or perhaps 50-60 days out. As pointed out by other posters, if you do the math, invariably the daily time decay is substantially lower (it's a worthwhile exercise).

I like the concept of writing the weekly options and they look good on paper, but they just don't give you enough bang for the buck (or protection).

When you think about it, the longer term calls (> 60 days) don't even afford you that much more protection unless you are willing to expose your self to more risk as you hold for expiration. As the underlying plummets, the option tracks less and less of the move, so it doesn't erode as fast as your main position (call delta drops). If you want to close out, now you're stuck with something that's probably got a fairly decent spread, so now you're going to eat that as well.

 

[etemtezcan]

I read in some place that optimal credit spreads trading is done by selling options which are 30-50 days away in expiry and are exited after 30 days after entry. This may also be applicable to your CC strategy. Thus possible strategy maybe selling 45 day options, wait 30 days and roll your short calls (i.e buy back short calls and sell longer calls). Always make this "rolling" operation in one atomic transaction which is selling a calendar spread. You will pay less commissions and find a better price. Possible reason for 30-50 days strategy is option premium decay is fastest in the last 1 month

 

[1a2b3cppp]

Quote from etemtezcan:

I read in some place that optimal credit spreads trading is done by selling options which are 30-50 days away in expiry and are exited after 30 days after entry. This may also be applicable to your CC strategy. Thus possible strategy maybe selling 45 day options, wait 30 days and roll your short calls (i.e buy back short calls and sell longer calls). Always make this "rolling" operation in one atomic transaction which is selling a calendar spread. You will pay less commissions and find a better price. Possible reason for 30-50 days strategy is option premium decay is fastest in the last 1 month

Whoa, 7th post in over 2 years! :eek:

Thanks. I'll look into that.

 

[KINGOFSHORTS]

Quote from 1a2b3cppp:

Well yeah, but if price moves down and away from a call's strike price, wouldn't it tend to go down? Doesn't selling calls put time decay on your side anyway? I would assume that as time goes on, there is less chance that the stirke price will be met and therefore the price of the option would go down.

Basically I want to be able to be able to get out of the original covered call (without taking a loss) and write a new covered call for a lower price in the event that the price of the underlying goes down.

Not necessarily. If Implied Volatility spikes up you might actually see the Call premium not change much on a point to point basis or potentially go up. Especially with far dated options that have a higher sensitivity to volatility.

 

[spindr0]

Optimal write in terms of decay is 1 month out.

Decision to roll involves several considerations:

First and foremost is neutral to mildly bullish outlook for UL. If outlook is bearish, get out of Dodge.

If UL somewhat unchanged, compare cents per day for holding current month which is closer to exp with cents per day available for the following month. IOW, waiting 14 days for 10 cts makes no sense if you can get 40, 50 cts or more for 42 days.

If UL is dropping, you may need to roll before next month's premium gets so small that you have nowhere except to a lower strike which may lock in a loss.

UL rising is always a pleasure to deal with

 

[matgallis]

while this isn't what you asked, you may want to consider selling a call spread against your position. Especially if you really like that stock and want to capitalize on both monthly premiums and unexpected positive events (mergers, buy-out offers, etc)