Selling options for cashflow (noob question)

Mr.Richter

Mr.Richter

Hey folks,
I'm trading several instruments since a long time, but have never traded options. I want to focus on this now because I want to generate cashflow without selling my stocks.

So let's assume I've got 30 shares of XYZ at 1,000 USD. Price is currently at 1,200 USD. To generate cashflow I'm planning to sell out-of-the-money calls.

- How do I do this?
- I could offer calls at a strike of 2,000 USD and a duration of 1 month. I think this scenerio won't happen - but I don't think that anyone would buy these calls or am I wrong? Is it a gamble, to find the sweet spot in selling naked or covered calls, of finding a scenario which don't happen but on the other side finding someone who is willing to buy these options or am I understanding something wrong here?
- Because options are valid for 100 shares, I can offer only my 30 shares and the rest are naked. If the buyer exercises the options, my 30 shares are gone or can set it up that it's "completely naked"?
- Is there a common way how to calculate prices for selling options?

Yes, regarding options I'm a noob. ;)

Bests,
Richter
 
The probability of your option to get called will be priced at the premium strike.
Or at least that is how it should be. You could write those options but the price must be attractive to the buyer.

If you are already saying that is highly improbable that those strikes will hit, the premium that you will collect will be very low, considering that anyone buys those calls. That sweet spot should come from the implied volatility of the stock.

The game is at calculating that expected volatility in order to offer a contract that won't get called. Bear in mind that the caller is doing exactly the opposite as well. So a bit of luck is always in order.
 
Mr.Richter said:
Hey folks,
I'm trading several instruments since a long time, but have never traded options. I want to focus on this now because I want to generate cashflow without selling my stocks.

So let's assume I've got 30 shares of XYZ at 1,000 USD. Price is currently at 1,200 USD. To generate cashflow I'm planning to sell out-of-the-money calls.
More...

Unless you have the highest level of option trading permissions, your broker won't let you do that.

- Because options are valid for 100 shares, I can offer only my 30 shares and the rest are naked. If the buyer exercises the options, my 30 shares are gone or can set it up that it's "completely naked"?
More...

And this is the reason.

- Is there a common way how to calculate prices for selling options?
More...

Yes - assuming you know the future volatility of the underlying. :D

OK, I'm being "haha only serious" here. That's a technically correct answer... the catch in it is that you'd have to know the future. If that doesn't sound very different from trading stocks, that's because it's (mostly) not; you get paid for taking on the risk of not knowing.

What you do have is the market's best current prediction of the "correct" price for that option. That's what you get when you look at the option chain for the name, term, and strike that you've chosen. The trick is choosing the "right" ones...

I'm going to guess that you want to trade covered calls because you've heard that it's a "safe strategy for newbies." Yeah... it's not. In fact, there's no such thing. Every trade is a combination of risk, reward, and win percentage - and, unless you have some special knowledge (i.e., are consistently "more right" than whoever takes the other side of that trade), they all sum up to an expected value of ZERO. Assuming you don't make a mistake or do something stupid. Oh, and minus "friction" (fees, B/A spread, etc.), of course.

Since your assumption about your stock seems to be mildly bullish - covered calls are a bet that it's going to stay at its current price or go up a little - you might want to check out credit call spreads instead. There's almost no risk of having your stock called away, and if your assumption is right, you can get the return you're looking for at about the same level of risk.
 
I've done covered calls for about 35 years...They are the most boring things out there. Things can happen; (the stock drops 50%) during your call period, stock gets bought out, government investigation, ect...

I have started to do "way out of the money CCs".

YOU REALLY NEED TO OWN 100 SHARES TO DO THIS RIGHT (as a beginner). You do not want to have a margin on a stock with an option trade (and the broker won't let you...So forget it).

Do you have money (over $50,000. invested in the market)? Here would be my first option (covered call) trade. I would do a real trade vs a paper trade (you can see a lot more of the moving action).

This may sound crazy...Buy 100 shares of BP or ADM. These two companies are probably not going away (boring as all get out)!! They pay a consistent dividends (so if they drop greatly, you still have the option money and the dividend money).

Then do a covered call (1) "sell to open" between 6 months to about 14 months out. You may want to do "way out of the money"...(15-20% above the current price).

You will get a small amount of money for the call. This money can be reinvested or just put into a money market fund (compounding...Know/understand that word).

You can watch the stock/option action of the trade. You can watch and learn about the time decay. You will gain a ton of knowledge from just watching the trade. What happens when the stock X dividends?? What happens just before earnings...After earnings??

Ask questions here or with someone you trust about the trade and the good and bad of options.

Here is a site you need to spend hours per week (rabbit holes) you can go down...

https://www.investopedia.com/

Good luck on your journey...
 
Mr.Richter said:
Hey folks,
I'm trading several instruments since a long time, but have never traded options. I want to focus on this now because I want to generate cashflow without selling my stocks.

So let's assume I've got 30 shares of XYZ at 1,000 USD. Price is currently at 1,200 USD. To generate cashflow I'm planning to sell out-of-the-money calls.

- How do I do this?
- I could offer calls at a strike of 2,000 USD and a duration of 1 month. I think this scenerio won't happen - but I don't think that anyone would buy these calls or am I wrong? Is it a gamble, to find the sweet spot in selling naked or covered calls, of finding a scenario which don't happen but on the other side finding someone who is willing to buy these options or am I understanding something wrong here?
- Because options are valid for 100 shares, I can offer only my 30 shares and the rest are naked. If the buyer exercises the options, my 30 shares are gone or can set it up that it's "completely naked"?
- Is there a common way how to calculate prices for selling options?

Yes, regarding options I'm a noob. ;)

Bests,
Richter
More...
Have you ever heard of "broken wing butterfly"? If not, google it.
 
Brokers don't check your previous experience. They just ask you questions to cover themselves in case of a loss.

You can just tell them that you have 20 years of experience and they won't care at all.

They have to ask you those questions as a formality.
If they don't let you do anything just fill the answer they want to hear. You can even resend the form and modify the answers at your will.

This is specially true with American brokers.
 
If you don't know what you're doing and want covered calls, just buy an ETF that does it.

Have you looked at your broker's data for option prices and volumes? I doubt there's much traffic in 1 month calls for the stock to go from $1200 to $2000. Look at the bids and asks and whether they actually have some volume.

Even if you did all the work to sell calls at prices more attractive than other market makers, what's you upside after doing all that work? You'd have to build such an awesome model for whatever you're selling calls that you consistently win enough money to justify the risk.
 
Hey, thanks for the answers so far, folks!

My brokers let me do nearly everything - but at the moment, with my knowledge, it seems like a sure way to lose some money. ;)

BlueWaterSailor said:
... the catch in it is that you'd have to know the future. If that doesn't sound very different from trading stocks, that's because it's (mostly) not;
More...

Ahhh. I see. This statement nails it down.

Concrete: I've got a position in MSTR and am thinking about building a long-term position in TSLA. In addition to buy-and-hold for the next years, I want to generate some cash flow. I'll definitely look into the credit call spreads and broken-wing butterfly.

But, at the moment, it would be easier for me to simply sell and buy back 10-20 % of my position occasionally.
 
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