Why covered call?

[Wheezooo]

Stupid? How could receiving consistent additional income on a portfolio you hold reduce your returns?

Perhaps you could grace us with your wisdom...

Because you are giving up something to get it. Shouldn't reduce or add, do it thousands of times and it should be neutral.

keep selling puts produces consistent income? can be in the scenario you read in some dumb books. you don't get the basic logic of an option price and conditional probability. big mouth, small punker, linear mind, really wish more of you doing nonlinear trading

This guy. Only one here that knows what he is saying. Doesn't say it nicely, but nonetheless the only one here that makes sense.

 

[blueraincap]

Because you are giving up something to get it. Shouldn't reduce or add, do it thousands of times and it should be neutral.

This guy. Only one here that knows what he is saying. Doesn't say it nicely, but nonetheless the only one here that makes sense.

These guys here don't have any understanding of the notion of price evolution (distribution). Whatever distribution you assume doesn't matter but there is some potential evolution and these small punkers naively assume constant volatility which led to their "consistent income" thinking. I have indeed come across some books written by/for jerks making the same statement. Considering asymmetric volatility and vol clustering, covered calls outperforms in mild volatility (steadily rising) environment and underperforms in a crash. It is as simple as that, unless you have a tactical view on volatility

 

[nooby_mcnoob]

With all these geniuses, I wonder why they wouldn't stop to think that maybe an investor would... I don't know... Change tactics during a change in market parameters.

 

[rabbitsfoot]

You should ask @rabbitsfoot for hard proofs on his baseless claims.

How is my answer baseless? Did you even read my comment "Covered Call strategy is used to supplant buy and hold strategy". Nowhere in my answer I alluded that someone should take a dive into this strategy just because a free lunch is sitting there.

Covered call strategy works better when someone absolutely loves a stock and decides to go long in it. Some people love certain stocks like how Warren Buffet loves AAPL, some people get stocks through their employers and decide to hold on to them for a while. For the argument's sake, someone could absolutely love TSLA despite its idiosyncratic CEO or its weak revenue model or its volatility and he's happy going long in it. Now there are two options on what to do with those stocks -

1. Do nothing. Buy and sit through the ups and downs of the market and capture dividends (if any)
2. Do everything above but also write high probability (say 90%) covered calls to reduce the cost basis. There might be an assignment risk if someone is forced to forfeit their stocks at a lower price than the market but you also have been collecting premiums for selling those calls. That offsets some (or all) of the money left on the table. After all, its your judgement on how far OTM and out in the future you wanna go.

I don't have any backtesting results to support this claim but I've been doing it myself for MSFT over last three years. I love this stock and the company and it has options available with weekly expiration. I write high OTM weekly calls. I avoid writing calls around dividends every quarter to capture them. If at all the stock rallies and moves past the breakeven point of my sold CALL, I roll it out to the next week or so while also capturing some additional premium. All rallies loose their steam eventually, at least for a little while. If the stock pulls back (like Dec 2018), I'm still better than the simple buy and hold strategy because I've been consistently reducing my cost basis.

 

[nooby_mcnoob]

I roll it out to the next week or so while also capturing some additional premium

You usually roll out of the current week at a loss in this case, right? I am surprised you end up net positive premium. I'd expect roughly equal

 

[ironchef]

How is my answer baseless?

Inside joke between @drmark27 and I. My apology if I offended you.

Nothing to do with you. @drmark27 demanded hard proofs for my "baseless claims" yet he let you off easy.

 

[ironchef]

How is my answer baseless? Did you even read my comment "Covered Call strategy is used to supplant buy and hold strategy". Nowhere in my answer I alluded that someone should take a dive into this strategy just because a free lunch is sitting there.

Covered call strategy works better when someone absolutely loves a stock and decides to go long in it. Some people love certain stocks like how Warren Buffet loves AAPL, some people get stocks through their employers and decide to hold on to them for a while. For the argument's sake, someone could absolutely love TSLA despite its idiosyncratic CEO or its weak revenue model or its volatility and he's happy going long in it. Now there are two options on what to do with those stocks -

1. Do nothing. Buy and sit through the ups and downs of the market and capture dividends (if any)
2. Do everything above but also write high probability (say 90%) covered calls to reduce the cost basis. There might be an assignment risk if someone is forced to forfeit their stocks at a lower price than the market but you also have been collecting premiums for selling those calls. That offsets some (or all) of the money left on the table. After all, its your judgement on how far OTM and out in the future you wanna go.

I don't have any backtesting results to support this claim but I've been doing it myself for MSFT over last three years. I love this stock and the company and it has options available with weekly expiration. I write high OTM weekly calls. I avoid writing calls around dividends every quarter to capture them. If at all the stock rallies and moves past the breakeven point of my sold CALL, I roll it out to the next week or so while also capturing some additional premium. All rallies loose their steam eventually, at least for a little while. If the stock pulls back (like Dec 2018), I'm still better than the simple buy and hold strategy because I've been consistently reducing my cost basis.

I do have a couple of comments on this if you don't mind:

1. You can come out ahead if you don't write cover calls mechanically, i.e., you have a correct opinion of the underlying direction and timing.

2. Do you realize that if your intend is to hold the underlying long term, i.e, buy it back if called, or keep pushing the option out until you run out of room and be called away, then immediately buy it back, you are effectively selling naked calls?

If you have time, look into some of the old posts by Maverick74 and his discussions on writing options to generate income.

 

[rabbitsfoot]

You usually roll out of the current week at a loss in this case, right? I am surprised you end up net positive premium. I'd expect roughly equal

It depends on how much ITM my call goes.
First, I mostly write farther out calls having 80% or more PoP.
Second, its unusual for a mega cap stock like MSFT to go far enough beyond the 80% PoP strike that it can't be adjusted with rolling out a few times.