Selling a covered calls for daytrading/swing trading

[john7722]

Hello,

From time to time I make a swing trade or day trade if I see an opportunity .
I was thinking if selling a covered call at the same time would be a good idea.

Let say a stock opens at $100 . You not gonna hold overnight.
You think it might go to $104 today and you are setting your stop loss at $99.5
I would also sell a covered call closest to exp with a strike price of $104 or $105

I think my success rate when picking a direction is about 50% so If I am wrong I would at least make little premium from the selling a call.

Is this a dumb idea?
Thank you for your help.

 

[Robert Morse]

IMO, you have chosen that stock to rise more than another, selling that call will limit your gains when you are right. Then if you go back to your 50% success rate, that only works if your gains exceed your losses. By selling that call, you are limiting your gains. IMO, when trading, you either need a process to pick winners with a high success rate or a low success rate but where the losses are small, and the gainers are great. As you can tell, I'm not a fan of buy-writes. I think they give very little protection and limit gains. It sounds like you need to work on your selection process to achieve a higher win rate. On Lightspeed Trader, we offer Light Scan and Risers and Fallers that can help you find stocks to trade. https://www.lightspeed.com/trading-platforms/lightspeed-trader/platform-features/

 

[newwurldmn]

Hello,

From time to time I make a swing trade or day trade if I see an opportunity .
I was thinking if selling a covered call at the same time would be a good idea.

Let say a stock opens at $100 . You not gonna hold overnight.
You think it might go to $104 today and you are setting your stop loss at $99.5
I would also sell a covered call closest to exp with a strike price of $104 or $105

I think my success rate when picking a direction is about 50% so If I am wrong I would at least make little premium from the selling a call.

Is this a dumb idea?
Thank you for your help.

Most of the time the prevailing factor will be delta. You are better off just trading fewer shares.

in the rare event that gamma becomes relevant you will wish you hadn’t sold the call.

 

[volpri]

IMO, you have chosen that stock to rise more than another, selling that call will limit your gains when you are right. Then if you go back to your 50% success rate, that only works if your gains exceed your losses. By selling that call, you are limiting your gains. IMO, when trading, you either need a process to pick winners with a high success rate or a low success rate but where the losses are small, and the gainers are great. As you can tell, I'm not a fan of buy-writes. I think they give very little protection and limit gains. It sounds like you need to work on your selection process to achieve a higher win rate. On Lightspeed Trader, we offer Light Scan and Risers and Fallers that can help you find stocks to trade. https://www.lightspeed.com/trading-platforms/lightspeed-trader/platform-features/

Unfortunately many take the stance that higher win rate is not much of a factor, if any. Almost as if to say a low win rate is preferred. Lol. Theoretically one can massage math to seemingly say something that is outside the realm of a real life trading world.

Why would a trader not just pick a process with high win rate, small losses, and gainers great? Well because such a thing implies tight SL’s and for it to succeed means nigh perfect entries. Something extremely hard to obtain. In short-term intraday trading such a scalping 1 to 8 points in say the ES, averaging down can be a mechanism used to increase win rate. But that too is detested as a “losers technique.” Why? Because for averaging down to work well it implies employing wider SL’s and in it’s execution it is counter-intuitive. And when a trader does take a hit the loss can be greater than all than all the session’s previous gains combined.

So, to make averaging down work one has to employ an additional mechanism for those times when a loss occurs. To counter the effect of the loss and to end the session “in the money.” One such mechanism is when wrong and a loss occurs on an averaged down position, then double up and go in the correct direction, getting the loss back in less price travel distance. That too is counter-intuitive in execution and psychologically hard to implement, for most traders. In addition, doubling up has it’s own risk factors….namely whipsawing..lol

A trader has to be selective in the doubling up technique. It can’t be revenge trading. There has to be a logical reason for doing it. One concept to keep in mind is market inertia. Markets tend to keep doing what they are doing until they don’t. So, if it appears that inertia is still fairly strong then such a context can favor a successful implementation of doubling or tripling up mechanism. Betting the market will continue to move enough to get back the previous averaged down loss and perhaps more.