Selling covered call on ETFs

O

osho67

I want to follow following strategy foe selling covered call on ETFs

Buy 100 shares of DIA or SPY or QQQQ or OEF (more suggestions welcome) and immediately sell one call at the money. What can happen at the expiry ? either shares are called away or the option expire worthless. Repeat the process. Planning to sell options only for the near month.

Worst case -price may drop and I am left holding the stock. But with above ETFs there cant be a disaster. (I hope).

Comments welcome and much appreciated. I have not found any ETF with weekly options, otherwise I can repeat the process every week. I feel even in a Black swan event I can never be wiped out. might have to wait several months to couple of years for resuming the process.

Yesterday I bought 100 shares od DIA and sold one call option for July expiry and got £71 for seven days. The cost of shares was £5006. Not a bad return.

What is the downside of this strategy? How can I improve on the concept? All feedback much appreciated. Thanks
 
While it's true that as long as you're not leveraged, a Black Swan event can never wipe you out, it's not the basis of a great plan. I would hope that the reason for buying an ETF and selling covered calls is that you are mildly bullish. Just buying an ETF in order to write covered calls on it is no edge and in the long run, chasing a small premium while being exposed to larger risk isn't going to get you anywhere fast.

What can you do to improve this strategy? I would look to learn how to trade the underlying. Buy it on up days and catch some of the ride. Do the reverse on down days. Use options to collar the position so that a Black Swan (or even a polka dfotted cob) isn't a serious consideration. You can always add a covered leg to an underlying in order to limit the damage if you're timing is off. And once the CC or CP is in position, you can still trade the underlying intraday.
 
Quote from TrailingStop3:

Hi osho67,

For more information on you concept you may want to read this book: http://www.amazon.co.uk/Option-Writing-Strategies-Extraordinary-Returns/dp/0071448837

You can also write naked puts instead of writing covered calls. It has the same risk/profit profiles and save some commissions and you do not need to pay for the underlying.

Daniel [/QUOT

Thanks fot the suggestion of the book.

Naked put at the money might need as much margin as buying the ETF. I sleep well at night if I have the shares.
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Quote from osho67:

Quote from TrailingStop3:

Hi osho67,

For more information on you concept you may want to read this book: http://www.amazon.co.uk/Option-Writing-Strategies-Extraordinary-Returns/dp/0071448837

You can also write naked puts instead of writing covered calls. It has the same risk/profit profiles and save some commissions and you do not need to pay for the underlying.

Daniel [/QUOT

Thanks fot the suggestion of the book.

Naked put at the money might need as much margin as buying the ETF. I sleep well at night if I have the shares.
More...

Having the shares and selling a call is the same as the naked put, there is no difference and you should sleep the same. What would make you lose sleep with one vs. the other?
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I began working with options about a year ago to redice risk in my stock portfolio and generate some income. My strategies have been selling CCs, collars, and selling puts.

Agree wholeheartedly with Spindr (my results validate it) income from CC's become meaningless fast when the stock drops 30% and the CC premium you get also drops substantially. In the bear market of 2000-2002 the SPY dropped at a rate of 2% a month over 36 months, but the 2008 bear market it plummeted at a rate of over 5% per month.

Better yet, there are stocks (and ETF's) that do well in all types of environments, defensive stocks, small cap stocks, shorts, etc, and stay with an underlying that trends up. Hopefully try to find one not too volatile.

Try to buy the stock at support and sell the call at resistance. If the stock breaks support and remains below support for 3-4 days, move on. Google Victor Sperandio or Trader Vic to find a good workable discussion of dealing with technical analysis.

I know Im relatively new here but this strategy has served me well over the last year.
 
Quote from osho67:

I want to follow following strategy foe selling covered call on ETFs

Buy 100 shares of DIA or SPY or QQQQ or OEF (more suggestions welcome) and immediately sell one call at the money. What can happen at the expiry ? either shares are called away or the option expire worthless. Repeat the process. Planning to sell options only for the near month.
More...
I've been doing this strategy for years now. Along with some previously mentioned downsides, one is boredom.

My question to you is when do you buy back your short option ... 1 day before expiry? 2 days etc.
 
Quote from spreadem:

I've been doing this strategy for years now. Along with some previously mentioned downsides, one is boredom.

My question to you is when do you buy back your short option ... 1 day before expiry? 2 days etc.
More...


Investing is not a game. Do not trade to avoid boredom.

Buying back the option. Recommended (by me) choices.

a) Any time the price is low enough and you don't ant to wait until expiration to collect the remaining premium.

Buying back this option at a low price allows you to sell the enxt month option sooner. That gives you additional premium.

b) Any time the roll is attractively priced.

For example, Assume you hope that the near-term option expires worthless (or you buy it back for a nickel or two) and you hope to be able to write another call for the next expiration cycle and collect $2.

Any time you can complete the spread: buy short option and write new option - and collect more than the $2 you were hoping for - that's an appropriate time to enter that spread order.

c) If you plan to buy back the option - why wait for the last day or two? If you plan to pay a specific price for that option (perhaps $0.05), then buy it as soon as it reaches that price. there is nothing to be gained by waiting. The sooner you buy, the sooner you can write the next term option.

Buying back is more related to risk management than the calendar.

Mark
http://blog.mdwoptions.com/options_for_rookies
 
Quote from dagnyt:

Investing is not a game. Do not trade to avoid boredom.

Buying back the option. Recommended (by me) choices.

a) Any time the price is low enough and you don't ant to wait until expiration to collect the remaining premium.

Buying back this option at a low price allows you to sell the enxt month option sooner. That gives you additional premium.

b) Any time the roll is attractively priced.

For example, Assume you hope that the near-term option expires worthless (or you buy it back for a nickel or two) and you hope to be able to write another call for the next expiration cycle and collect $2.

Any time you can complete the spread: buy short option and write new option - and collect more than the $2 you were hoping for - that's an appropriate time to enter that spread order.

c) If you plan to buy back the option - why wait for the last day or two? If you plan to pay a specific price for that option (perhaps $0.05), then buy it as soon as it reaches that price. there is nothing to be gained by waiting. The sooner you buy, the sooner you can write the next term option.

Buying back is more related to risk management than the calendar.

Mark
http://blog.mdwoptions.com/options_for_rookies
More...


Mark, You have expressed very well. Thanks for your views
 
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