Question on a covered call going the wrong way

[Norman D Gutter]

vhehn:

Quote from vhehn:

why waste the money and commish to buy it back. in 3 days it expires then sell the march call.

Yeah, I'll just let it expire. I had that on my sheet as one of the strategies, but failed to put it in my first post. Too worried about the boss coming up behind me, I guess.

NDG

 

[Norman D Gutter]

Hi Osorico:

Quote from osorico:
Hi Norman...

....Since CC is a bullish to neutral strategy, with expiration or assignment a huge consideration to the strategy,
what would you have done if the stock moved up 4 points instead? Were you gonna let your 75.22 + commish shares be assigned for 75.00? At what point would you have bought back your call?

I had thought about that. The first covered calls we did, in the Fall of 04, were to sell calls on two stocks we were holding as position trades. Both stocks promptly went up big, we bought back the calls to participate in the upside, and the stocks backed off to our stop. We made some profit, but would have been more profitable to let the calls run and take assignment. So, my "exit" strategy to the upside was to let the calls run. I was satisfied to get 1 to 2 percent premium gain for two weeks, so I was determined to not get caught up in buy-back for upside.

IMO, to do at-the-money CC trades as described, successfully and with somewhat less risk, you need to put on a collar. That is, sell the CC and buy a cheaper, lower strike put.

I'm not sure I understand this. A collar, as I understand it, does protect against downside movement, but would have to be for a net credit or have the stock OTM on the call to have any profit potential. I need to study this more. Thanks for the suggestion.

I don't mean to be condescending, but it seems you don't have a clear picture of the risks for your trade strategy. But you know the rewards part very well And now you are groping with another half thought out strategy just to break even. Actually, it's the same strategy with different numbers... are you really expecting a different result? Take the loss and start anew. You may even determine that a different underlying is a better trade.

Again, I don't mean to make enemies. ET is a place where we can all learn something, when not taken personally.

No need to fear being condescending with me, or making enemies. Your comments are spot on. As I said in my reply to donnav, I had fairly limited objectives with this series of trades, somewhat as a learning experience. You are right: I had a pretty good idea of the rewards, but not of the exit strategies for each of the trades. Based on my underlying picks, of the stocks not doing much for several months, and being only two weeks to expiration, I felt the downside was fairly small, and it was a good chance to test my emotions, watching the stocks move this way or that and knowing there were X days to expiration, Y days to expiration, etc. Except for this INFY thing, I'd be $300 up on the six trades--small money, I know, but as I said it was a toe dipped in.

Thanks for the replies. I certainly don't take them personally. The Options forum seems to be about the only place at ET where sanity rules, and where traders really are trying to be helpful.
NDG

 

[jrlvnv]

I don't understand why you would put this trade on in the first place. With a 100 share order you profit was only about 100 dollars. So you put up 7500 to make a 100. Now your looking to break even on the trade. In my opinion you should be looking for cheaper stock to do your CC with so you could buy more stock and sell more options. Just my 2cts though

 

[ktm]

I used to deal in underlyings and cc's some years ago. I had 90% winners and the 10% of losers killed the other 90. A few stocks closed and never reopened.

I may play this game again someday, but not without some downside protection that would keep those 10% from being such monster losers. Those who are very solid at stock picking for the long haul are best at grabbing a few extra points a year via cc's. The problem is that a few companies get caught lying every year about some element of the business and promptly get taken out and shot. If you aren't going to have solid downside protection, I would suggest being very very comfortable with your knowledge of the business.

 

[Norman D Gutter]

Hi luh:

Quote from luh3417:

Norman, what is your reaction to the idea of: you sell some naked puts on INFY? How would you feel about this strategy vs. your strategy of covered calls...

I would also refer you to the recent poll about the best options exchange.

At present, I don't have authorization from my broker for naked option writing. Seems they don't see the risk potential as the same, for some strange reason. I've been paper trading some naked puts, and look forward to the day when I will trade them for real.

Best Regards,
NDG

 

[Norman D Gutter]

Hi Wayne:

Quote from wayneL:
This will put the trader into p a position of the stock HAVING to go up to profit, because what you have is a synthetic bull spread.

This then begs the question, why not just trade the spread? Same payoff diagram, with vastly less capital usage.

That way, the trader can somewhat replicate the payoff of a CC to the upside/sidewaysside by tradiing an OTM bull put spread, and have some downside protection to boot.

I've been studying spreads, and have paper traded a couple. They both went to maximum loss within two days. The surest way for a stock to go down is for me to buy it, of for a stock to go up for me to exit a losing position. I can understand how the market makers know my orders, but even my paper trades?

Thanks for the suggestion,
NDG

 

[wayneL]

Just be sure to know that a collar IS a vertical spread and changes the greeks of a covered call

i.e.

Covered call = short put

Collar = vertical spread

Cheers

 

[Norman D Gutter]

Hi Chris:

Quote from ChrisM:
And what do you do if stocks keep going down more and more ?

This strategy does not have very much to do with opportunities of options, it is just one of stocks bullish strategies variations instead.

Therefore, as Donna previously stated, you will not find any option solution for this, as the trade was stock directionally oriented from the beginning.

Thus, you need design exit strategy BEFORE you trade. My recommendation is - get out, do your homework, then get back.

The best old rule is - if you`re wrong, do not try to improve yourself, just get out and accept the loss.

As I said in my reply to Donna, my goals for the trade were more educational for myself, with modest profit goals. I did not have a true exit strategy. As I implied in a previous response post, it seems that everytime I exit a losing position it immediately spikes to where if I'd stayed in it would have been a huge profit.

So I'm struggling, and hoping for some help. What would you suggest to have been a proper exit strategy for this trade?

NDG

 

[osorico]

Quote from wayneL:

This will put the trader into p a position of the stock HAVING to go up to profit, because what you have is a synthetic bull spread.

This then begs the question, why not just trade the spread? Same payoff diagram, with vastly less capital usage.

That way, the trader can somewhat replicate the payoff of a CC to the upside/sidewaysside by tradiing an OTM bull put spread, and have some downside protection to boot.

1) There is nothing synthetic about owning the underlying, as is the posters scenario.

2) Generally, synthetic positions involve a combined position at the same strike. This is not the same as a collar as described.

3) Poster was clearly looking for exit strategy. Spreads are usually not used for such.


Osorico

 

[luh3417]

Quote from Norman D Gutter:

Hi luh:

At present, I don't have authorization from my broker for naked option writing. Seems they don't see the risk potential as the same, for some strange reason. I've been paper trading some naked puts, and look forward to the day when I will trade them for real.

Best Regards,
NDG

It sounds then like you understand that writing a covered call is basically identical to writing a naked put. (Don't tell your broker though).