Why not just write OTM covered calls on your stocks
- Thread starter zedDoubleNaught
- Start date
WTF are you recommending a synthetic long? How is it preferable to simply buying the shares?
I guess all your growth stocks only go up. Lol
All of this talk about only making the premium is way off target. When you sell calls you do get the advantage of being on the right side of declining time premium (IOW: you get paid as the premium goes down). BUT the amount of money you make is much more than just the premium, it is equal to the delta of the options which ATM (at the money) are typically 50% - so you profit 50% (50-cents) for every dollar the stock goes down while you own the covered call, or $150 for a $3 drop.
Why do it? On a given day your 100 Microsoft shares could drop by 3 points. You have $127,000 tied up in that stock, but you could sell 1 weekly contract for $184 and pick up $150 (buy it back for $34) - off-setting 50% your loss for the day.
So, you made money, hedged your MSFT position, but did not have the tax consequences of selling $127,000 of stock. If you buy the calls back you do have short-term tax consequences, but it is only on $184, not $127k.
Sell the option, let the stock come back up the next day and start over. Do it 3 times a week and your stock is still at $127 but you are $450 ahead, so the cost basis of your MSFT just went down by $450, and you still own the stock so you don't have any larger tax consequences of selling the stock too soon.
The dividend matters because when a dividend is paid the company deducts the price of the dividend from the share price. As long as no one uses your calls to take your shares from you to collect the dividend, that price deduction would actually profit your covered call, but you have to watch out for a situation where the dividend is higher than the extrinsic value of your covered call, because then you have an arbitrage situation where someone could buy your calls and exercise them to collect your dividend.
This happened to me with AT&T which was paying almost a 7% ($.50) dividend because it was only trading at 30. I had 2000 shares and hoped to make about $700 from the dividend plus get the benefit of a $.50 drop in the share price boosting my covered call value. BUT I woke up that morning to see someone had used their long calls (obviously trading for less than $.50 at the time) to take my 2000 shares away - and to get my dividend, so I lost the dividend - BUT, at least I still made money on the covered calls because I was already ahead on them (plus they had time premium) so I made money when they were closed. Instead of $700 dividend I made about $500 profit. In other words, it could have been worse - I didn't lose money, I just didn't make what I hoped to make.
The ideal covered call situation is a guy who is vested in a 401k and holds 10,0000 shares of a given company because he worked there 20 years. If the stock is a very slow trader (like utility or shipping company) then selling covered calls once a month can be very valuable (just take care not to do it over earnings, or dividends unless you go so far OTM that it is not worth it to anyone to exercise your calls, take your stock and collect the dividend.)
Anyone who trades options at all should be aware of the influence of dividends - because although they do not directly change the options price, they do affect the price of the underlying and therefore affect the options value.
And if you do not understand what I am saying - do some more research because it takes time to understand all of the consequences, but you can be sure this is a very common option strategy.
Why do it? On a given day your 100 Microsoft shares could drop by 3 points. You have $127,000 tied up in that stock, but you could sell 1 weekly contract for $184 and pick up $150 (buy it back for $34) - off-setting 50% your loss for the day.
So, you made money, hedged your MSFT position, but did not have the tax consequences of selling $127,000 of stock. If you buy the calls back you do have short-term tax consequences, but it is only on $184, not $127k.
Sell the option, let the stock come back up the next day and start over. Do it 3 times a week and your stock is still at $127 but you are $450 ahead, so the cost basis of your MSFT just went down by $450, and you still own the stock so you don't have any larger tax consequences of selling the stock too soon.
The dividend matters because when a dividend is paid the company deducts the price of the dividend from the share price. As long as no one uses your calls to take your shares from you to collect the dividend, that price deduction would actually profit your covered call, but you have to watch out for a situation where the dividend is higher than the extrinsic value of your covered call, because then you have an arbitrage situation where someone could buy your calls and exercise them to collect your dividend.
This happened to me with AT&T which was paying almost a 7% ($.50) dividend because it was only trading at 30. I had 2000 shares and hoped to make about $700 from the dividend plus get the benefit of a $.50 drop in the share price boosting my covered call value. BUT I woke up that morning to see someone had used their long calls (obviously trading for less than $.50 at the time) to take my 2000 shares away - and to get my dividend, so I lost the dividend - BUT, at least I still made money on the covered calls because I was already ahead on them (plus they had time premium) so I made money when they were closed. Instead of $700 dividend I made about $500 profit. In other words, it could have been worse - I didn't lose money, I just didn't make what I hoped to make.
The ideal covered call situation is a guy who is vested in a 401k and holds 10,0000 shares of a given company because he worked there 20 years. If the stock is a very slow trader (like utility or shipping company) then selling covered calls once a month can be very valuable (just take care not to do it over earnings, or dividends unless you go so far OTM that it is not worth it to anyone to exercise your calls, take your stock and collect the dividend.)
Anyone who trades options at all should be aware of the influence of dividends - because although they do not directly change the options price, they do affect the price of the underlying and therefore affect the options value.
And if you do not understand what I am saying - do some more research because it takes time to understand all of the consequences, but you can be sure this is a very common option strategy.
Never understood the logic of buying more if stock goes up, your getting in at an even worse price raising your average entry. I average down only
Not following you here
"Anyone who trades options at all should be aware of the influence of dividends - because although they do not directly change the options price, they do affect the price of the underlying and therefore affect the options value."
Dividends most definitely affect the options price.Options 101..
Also,people dont buy your calls and exercise them.They exercise the calls they are long.
You are a little off on a couple of your statements
"Anyone who trades options at all should be aware of the influence of dividends - because although they do not directly change the options price, they do affect the price of the underlying and therefore affect the options value."
Dividends most definitely affect the options price.Options 101..
Also,people dont buy your calls and exercise them.They exercise the calls they are long.
You are a little off on a couple of your statements
Almost every growth/momentum trader would rather stick sharp needles in their eyes than average down.Stops are their lifeline.A counter to your belief is,Why buy more when you are clearly wrong on your assessment of the stock??
.FWIW there are several academic papers written on Value investing and momentum.
.FWIW there are several academic papers written on Value investing and momentum.
I do a variation of this in my retirement account.
On the basis that I am no better at stockpicking than average, I have a portfolio of unexciting dividend paying shares in my SIPP, and write call spreads (short immediate OtM call, long next OtM interval) on them.
Writing naked calls in my experience can cause problems when price spikes and/or purchasers assign to take stock and dividends as @motterpaul explained.
Writing a spread provides some protection.
Also, the portfolio effect ensures that losses incurred on one share suddenly increasing in price are usually covered by gains on the remainder.
As an example, a USD50k portfolio is structured as 100 shares each of 10 dividend aristocrats, priced at USD50. Sell 51/52 credit call spread for a credit of c.USD0.3 for following week.
If no share rises more than 2%, profit is USD300 (0.6% over 10 days is 24% annualised)
If one or more rise in price, max loss per contract is USD1.00, so USD100 to buy the contract back. It might be appropriate to roll it forward, receiving another USD30 credit against the USD70 net loss.
In this example, I can afford a total loss on four of the ten companies, paid for from the credit received on the portfolio of ten companies. Upside in share price (less the net cost of buying back the spread is retained.
On the basis that I am no better at stockpicking than average, I have a portfolio of unexciting dividend paying shares in my SIPP, and write call spreads (short immediate OtM call, long next OtM interval) on them.
Writing naked calls in my experience can cause problems when price spikes and/or purchasers assign to take stock and dividends as @motterpaul explained.
Writing a spread provides some protection.
Also, the portfolio effect ensures that losses incurred on one share suddenly increasing in price are usually covered by gains on the remainder.
As an example, a USD50k portfolio is structured as 100 shares each of 10 dividend aristocrats, priced at USD50. Sell 51/52 credit call spread for a credit of c.USD0.3 for following week.
If no share rises more than 2%, profit is USD300 (0.6% over 10 days is 24% annualised)
If one or more rise in price, max loss per contract is USD1.00, so USD100 to buy the contract back. It might be appropriate to roll it forward, receiving another USD30 credit against the USD70 net loss.
In this example, I can afford a total loss on four of the ten companies, paid for from the credit received on the portfolio of ten companies. Upside in share price (less the net cost of buying back the spread is retained.