This is some better but why not use a leap instead of the stock or a calender spread. What this becomes is a straddle with a front month call sold against it or a strangle with the same. These make much more sense than a straight covered call. If you think the stock will rise then sell the put side. Use a SAR and trade either side depending on direction.
Winning 20% yearly on a covered call portfolio
- Thread starter Mispe
- Start date
Late to answer, excuse me.
When I say my account, I mean the stocks plus the short calls. If the stock is up 5 points good ! but I have to buy back the call and sell another one at higher strike. This rolling up has a cost that partially offsets the rise on the stock. By experience on a long term the cost is roughly half of the rise. The reverse is true a loss of 5 points on the stocks can't be totally offset by the short call premiums (the one I buy back and the other I sell).
As far as the puts are concerned. You can't be fully protected.
First, to reduce the cost you need to select a strike OTM (more or less 10 points down the ATM strike) and second if the stock rise, when rolling up the short calls the cost rise the Break even.
But the puts are much needed for the meltdown cases that are not so unusual.
May be there is better way to execute this strategy ?
Thank you Doubter. I am coming from the quite outdated Buy-and-Hold Investors World and not quite used to pure play options trading. Let me consider your suggestion.
But anyway and generally I would prefer to avoid to make directionnal bet, my main purpose being to collect premium. Earning small but at very low risk and if necessary on a capital intensive basis.
Any short option whether put or call is a directional play. Unless it is part of a strategy that offsets it. Covered calls are directional to the upside. A straddle isn't directional but you lose if there isn't a pretty big move in either direction. The calender spread is a much superior IMO strategy to cc's because if you keep your debit to 2 or less and your months fairly far apart you don't have to sell many shorts to cover the debit. A big problem is when the spread moves deep ITM. There is where your protective put or call saves your bacon, but the cost of insurance is there.
Yes to your questions about the SAR. Use DELL since about April and apply the SAR. I started with a straddle and then began selling the front month calls. The straddle was at 25. When DELL was above 25 and starting down I sold calls. Then in July when it went down quite a bit I either bought back the call or let it expire worthless and sold the put from the staddle which had increased. Then I rode the remaining call back up until it was almost out of time and sold it. The alternative was not to sell the put in July but instead buy back the call and sell a put against that side. These are , however, directional plays with insurance. The income isn't quite as high but they are a little more bullet proof.
If you use IB the cost of buying shares is $.01/share and options $1/contract. The cost of commission on buying 100 shares and selling 1 call against them would be $2.
The bid/ask spread on shares is perhaps 1.5% and options perhaps 3%. If you roll up the options a lot that could eat into your profit but you have the same problem with naked puts or spreads.
I think the bigger danger is of the underlying collapsing.