When to place a covered call

[DrPepper]

Quote from Premium:

When I used to do these trades, I would buy on significant pullbacks. Not only do you get in at a better price, but the IV was usually higher which is good for selling options. Of course, you would still have to be neutral or bullish on the stock, based on technical support or fundamentals.

Did you buy both the underlying and the covered call on a pullback or did you already own the underlying and wait for a deep pullback to write the call?

The best place to buy the underlying is at point 1 after a pullback appears to be complete as price starts to turn up. But it seems to me that the best place to sell the call would be at point 3 when pricing is turning over after hitting resistance. However, I have not yet gotten into a study of volatility and do not know if volatility is predictably higher or lower at certain parts of a price wave, as you mentioned.

 

[Premium]

Quote from DrPepper:

Did you buy both the underlying and the covered call on a pullback or did you already own the underlying and wait for a deep pullback to write the call?

The best place to buy the underlying is at point 1 after a pullback appears to be complete as price starts to turn up. But it seems to me that the best place to sell the call would be at point 3 when pricing is turning over after hitting resistance. However, I have not yet gotten into a study of volatility and do not know if volatility is predictably higher or lower at certain parts of a price wave, as you mentioned.

I was talking about having no position on initially. So point 1 would be a good place to put on the entire trade since a covered call is neutral-bullish.

If the stock is already owned, it depends on a variety of things. Are you a long-term investor or are you actively trading the stock, and if so what were your criteria? If the stock has run up significantly and the IVs become cheap, I would actually purchase a put protection and maybe collarize the trade if you think there's overhead resistance (maybe like point 2 or 3). You could also write calls that are ITM if you're somewhat bearish on the stock in the short-term but you still like the stock.

 

[spindr0]

Quote from Premium:

When I used to do these trades, I would buy on significant pullbacks. Not only do you get in at a better price, but the IV was usually higher which is good for selling options. Of course, you would still have to be neutral or bullish on the stock, based on technical support or fundamentals.

AMZN has 3-4 point swings intraday. If I was that buy and holder holding some shares who's not that concerned with daily fluctuations (paper losses), I'd sell the calls on rallies and sell the puts on pullbacks. If it trades in a horizontal range, possibly cover the calls when you sell the puts and cover the puts when you sell the calls. Proactively trading the fluctuations is apt to get you a bit more net premium. Thank heavens I'm not that guy

 

[spindr0]

Quote from DrPepper:

I realize that there are a lot of variables involved in writing a covered call, but I am trying to focus on only this one aspect of covered call writing. That aspect is, at what point on a wave in an uptrending market is it best to write a covered call and, even more importantly, why?

It's really quite simple. You sell the covered call when the stock has reached its highest price before turning down. Polls won't help you with that determination.

In reality, the top can only be known in hindsight so you have to assess the risk vs reward as price fluctuates and sell the call when you think that the return is acceptable.

 

[Premium]

Quote from spindr0:

AMZN has 3-4 point swings intraday. If I was that buy and holder holding some shares who's not that concerned with daily fluctuations (paper losses), I'd sell the calls on rallies and sell the puts on pullbacks. If it trades in a horizontal range, possibly cover the calls when you sell the puts and cover the puts when you sell the calls. Proactively trading the fluctuations is apt to get you a bit more net premium. Thank heavens I'm not that guy

yes, that's what I said on pullbacks, which is placing the covered call position at that time(or the equivalent - selling puts). I like selling calls on rallies as well, in the form of credit spreads.

 

[KINGOFSHORTS]

I like to write them when I see a news related IV spike on my long term equity positions. Take advantage of the irrational side of the markets which add volatility. Which is nice, you get a nice cash payment in addition to dividends. It works well if you have a good idea of how your portfolio positions move over time and during news events and with these range bound markets it keeps your money and equity working.

 

[Lalit11]

I am holding 300 shares of GS at $184.57. My question is what would be the downside of me selling 3 180 calls for $5.00 against my position. I understand I would miss any upside past the $185, and if the stock continues to go down I am still holding the stock which is fine. Suppose the stock surpasses $185 before July, can the person exercise those shares? And what if the stock continues to go down how does the option price affect me if I already sold the the July 180 calls for $5.00. Lastly, would I be better off selling the $185 call for $3.70 or even the $190 calls if GS trades in the $160 price range. Thanks in advance.

 

[dagnyt]

Quote from DrPepper:

I am learning about options and am trying to clarify the best time to place a covered call when I already own the underlying. I would appreciate responses from anyone who trades covered calls on either stocks or futures profitably. See the chart below for the numbering.

Is it best to place a covered call when price:

1. Has made a higher low at support and is turning up.
2. Has made a higher high, but has not yet turned down.
3. Has made a higher high at resistance and is turning down.
4. Has made a higher low, but has not yet turned up.
5. None of the above

Thanks for your input!

Whenever you believe the stock is not headed lower

Whenever you are willing to accept the option premium and a limit on maximum profit.

There is no single 'best' time.

Mark