# Writing Covered Calls



## ENP

Also called buy/write and share renting. 

Basically, a friend of mine has begun "share renting" shares from Australia but on the NYSE in the USA. He does it through people called Sharelord or something like that, through a Jamie McIntyre course that he did. I haven't seen any of his accounts or anything buy he took out a personal loan from the bank and started doing it. 

He says he earns 5% return per month. This basically equates to about a 70% return every year. He says he spends 15 mintues per month actively doing it.

I mean 70% return with "no risk" is this guy for real? If it's this easy why doesn't everyone do it?

Look forward to your *honest * opinions on the subject. 

Thanks.


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## ENP

He also has told me he has "insurance" on his shares so if they go down too much he can sell them for not too much loss.


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## Mavis

There is always a risk..... Interest expense, cost of put options, the difference between the protected level and purchase price & transaction costs. He wouldnt be making 5% per month if he is buying puts at the money with the above costs. Plus the cost of course......


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## ENP

Well I'm not sure exactly how he does it, he just told me the basics.

He has a personal loan of $10k and I just checked the interest rates on them of 18% p/a.

So the 5% per month is probably before commission, fees, losses, tax, etc, etc?


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## Logique

Options in a market this volatile? He's braver than me. And he's borrowing money to do it? At 18% pa..!? And all the transaction fees for such a hands-on, high turnover strategy.

For the average retail investor, I would dismiss this out of hand.


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## Tysonboss1

I write covered calls over some of my holding periodically so I understand the stratergy and 5% / month sounds over the top, 

One thing that rings alarm bells with me is that he had to take on a personal loan of $10K to get started.

In my opinion if are looking to any form of wealth creation plan as a way of solving your money problem (not having any being the problem) then you are sure to lose in the long run, because the real problem that needs to be solved is your bad management of money which is why you have none in the first place.

Throwing more money at some body who can't handle the revenue streams(wages) they already have will only ever compound their problem over time.

If you are a beginner I suggest before you start any sort of wealth creation plan, Start by working on your money management.

Start spending less than you earn every week ( and I mean every week)
grow a few thousand dollars in a saving account 
and once you have a system of spending less than you earn and you have cleared debt and started generating savings(capital) then you can start to look at options of where you can deploy this capital to generate further income streams and capital growth.


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## Mavis

By having the put protection in place it actually reduces the volatilty within the position. Volatility also increases the options premium he would receive.


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## ENP

So 5% isn't very realistic?

He went to a seminar and now wants to live the dream (don't we all )

Quite frankly, I want this guy to fail. He has been saying how great his returns are (he's been doing it for 2 months). Whilst I have my money in cash saving up for use in investments. 

*What is a realistic return for writing covered calls per year?*


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## Mavis

It depends what shares you sell calls over. I have been doing this for about 10 years the best was approx 30% the worst around 10%. But then agian i sell naked calls and puts with only a few covered calls thrown in.


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## wayneL

_x_% per month return is totally the wrong way to look at covered calls. If it were that easy, the gurus would just systematically write CCs and be done with it. 

They don't.

Let's look at this a different way.

Supposing you own a basket of shares; you have two choices, just hold the share or systematically write calls over them.

Which is going to perform better?

In a rampant bull market, the CC strategy will *underperform*, just holding the shares will do better.

In a stagnant or bear market, the CC strategy will outperform the straight out share portfolio. You might not make a profit, but you will lose less.

...but in certain circumstances, the CC strategy will work against you over a series of trades no matter what the market is doing overall.

"Insurance" changes the structure of the returns because of how it affect the Greeks. A covered call with put insurance is simply a synthetic bull vertical spread, AKA a "collar".

This strategy has its uses and is a good one in the right circumstances, but it is no Holy Grail, despite what the seminar clowns say.

...and please do not use the term "share renting". It is inaccurate and misrepresentative of the mechanics of the strategy. 

Anytime you hear someone waxing lyrical about "share renting", think to yourself - "muppet".


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## ENP

wayneL said:


> _x_% per month return is totally the wrong way to look at covered calls. If it were that easy, the gurus would just systematically write CCs and be done with it.
> 
> They don't.
> 
> Let's look at this a different way.
> 
> Supposing you own a basket of shares; you have two choices, just hold the share or systematically write calls over them.
> 
> Which is going to perform better?
> 
> In a rampant bull market, the CC strategy will *underperform*, just holding the shares will do better.
> 
> In a stagnant or bear market, the CC strategy will outperform the straight out share portfolio. You might not make a profit, but you will lose less.
> 
> ...but in certain circumstances, the CC strategy will work against you over a series of trades no matter what the market is doing overall.
> 
> "Insurance" changes the structure of the returns because of how it affect the Greeks. A covered call with put insurance is simply a synthetic bull vertical spread, AKA a "collar".
> 
> This strategy has its uses and is a good one in the right circumstances, but it is no Holy Grail, despite what the seminar clowns say.
> 
> ...and please do not use the term "share renting". It is inaccurate and misrepresentative of the mechanics of the strategy.
> 
> Anytime you hear someone waxing lyrical about "share renting", think to yourself - "muppet".




Cheers for the explanation, I don't understand some of the terms you mentioned because I don't do call options or options at all myself. 

But just wanting to get a grips on the potential returns etc that is available.


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## mazzatelli

Mavis said:


> But then again i sell *naked* calls and *puts* with only a *few covered calls* thrown in.




Ugh seriously Wayne, there should be a sticky thread on the derivatives section with one of your explanations on covered calls, collars etc.

Generally folks can't tell the difference between naturals and synthetics, how market makers work, hedging etc...


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## wayneL

ENP said:


> Cheers for the explanation, I don't understand some of the terms you mentioned because I don't do call options or options at all myself.
> 
> But just wanting to get a grips on the potential returns etc that is available.




Well, basically anybody that says _x_% per month is talking out of their @ss. Anybody promoting 5% per month is specifically targeting stocks with high implied volatility (AKA perceived risk)

Why?

It only considers the premium received for the call and ignores the movement of the underlying.

Let's say you have a $100 stock on which you receive $5 premium on the ATM call... a purported 5% return.

But at expiry the stock has gone down to $90. 

Have you made 5%?

Nope!

On the other hand, what if the stock has gone to $120?

You keep the $5, but have your shares assigned, forcing you to sell at $100.

Yes a 5% return, but it could have been a 20% return.

NB There are dynamic management procedures that can be used to potentially boost returns, but the principle remains the same.





mazzatelli said:


> Ugh seriously Wayne, there should be a sticky thread on the derivatives section with one of your explanations on covered calls, collars etc.
> 
> Generally folks can't tell the difference between naturals and synthetics, how market makers work, hedging etc...




Yeah that's a good idea.


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## barney

wayneL said:


> Well, basically anybody that says _x_% per month is talking out of their @ss. Anybody promoting 5% per month is specifically targeting stocks with high implied volatility (AKA perceived risk)
> 
> Why?
> 
> It only considers the premium received for the call and ignores the movement of the underlying.
> 
> Let's say you have a $100 stock on which you receive $5 premium on the ATM call... a purported 5% return.
> 
> But at expiry the stock has gone down to $90.
> 
> Have you made 5%?
> 
> Nope!
> 
> On the other hand, what if the stock has gone to $120?
> 
> You keep the $5, but have your shares assigned, forcing you to sell at $100.
> 
> Yes a 5% return, but it could have been a 20% return.
> 
> NB There are dynamic management procedures that can be used to potentially boost returns, but the principle remains the same.




G'day Wayne, Maz and other option lads ..  

My knowledge on options is very limited so if I use the wrong terminology forgive me , but is the following strategy workable ....

I like stock XYZ and I think it might be ready to rise

Instead of buying the stock, I write a put option over the stock and collect x$ premium

If the stock falls and I get assigned, at least I get a slightly better entry price.

If I do get assigned, I write a covered call over the stock which gives me a bit more buffer if the SP drops further

Lets say the stock continues to drop and I want to get out .... Do I have to close the option position first before I can sell the stock, or does selling the stock automatically close the option position as well?   

The concept behind the above strategy would be to continue to write put options and collect x$ premium until assigned, but only on stocks I was happy to own anyway ....

Is that a valid strategy, and can it be improved on to lower risk ?? ..... Be gentle


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## BradK

Yes and no Barney. 

Writing puts and collecting the premium on stock you want to collect anyway seems like a good little buffer - ie. free money (although arguably not free because you are taking on risk). 

If you were going long on a stock, would you not expect it to be going UP? And what if it fell significantly below the circa 3% you were getting for premium? 

Not silly, but does not take into account major volatility swings. 

I have been out of call writing for 2 years now. 

Following the advice of Jamie McIntyre? Hmmmm... have a long lay down until the thought goes away. 

Brad


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## BrightGreenGlow

If you don't mind your shares getting executed its an AWESOME strategy... And yes 5% a month is do-able EASY! However you run the risk of limiting your profit return but if I have shares of 1,000 units I'll always write calls for them unless I buy because I think they are gonna be VERY bullish!

Great income strategy!


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## wayneL

Oh Brother!


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## wayneL

BrightGreenGlow said:


> If you don't mind your shares getting *executed* its an AWESOME strategy...



That's a bit callous. Shouldn't they be entitled to a fair trial first? :



> And yes 5% a month is do-able EASY!



Let's have some examples where you have done this MoM.



> However you run the risk of limiting your profit return




Eh?

5% per month year upon year doesn't sound like limiting profit to me. If 5% pm is so easily achievable, why worry?


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## BrightGreenGlow

wayneL said:


> Oh Brother!




Wayne, if those shares went down to $90 thats a win mate because they didn't get executed.... would you rather negate the $5 and still have your SP at $90? Mate, the more times you can get this $5 the more you've made for free. Your paper loss might have gone down due to the current SP, however, you'd have $20 in premium??

If your pay is to hold the stock, its a great strategy.... you say volatility... well if it a volatile stock you'd expect a better premium and if it gets executed you'll only limit your profit, its really a win/win if you plan it right. Also, since the stock is volatile chances are you'll be able to buy back in even cheaper maybe. 

I like this strategy anyways and I've made over $2k on BHP alone and every time I got executed the SP got hammered and I bought it lower again.  ie: Minerals tax lol!


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## BrightGreenGlow

Actually sorry 5% I was thinking about 5% per year not month. My apologies Wayne


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## mazzatelli

BrightGreenGlow said:


> Actually sorry 5% I was thinking about 5% per year not month. My apologies Wayne




If it's 5%p.a., better to put it in a term deposit.
Plus its exercised, not executed


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## BrightGreenGlow

mazzatelli said:


> If it's 5%p.a., better to put it in a term deposit.
> Plus its exercised, not executed




Yeah but you miss out on dividends. 5%p.a is safe.

Plus, its also called executed.... same thing mate.


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## wayneL

You may execute your right to exercise (or they may execute their right to exercise - AKA "assignment")...

...but it is not the same thing.


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## BrightGreenGlow

Once a party exercises their right, the shares are executed... :S seems the same thing to me :S


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## nunthewiser

mmmm

interesting stuff

now my knowledge of options would fit on a postage stamp but i do know a fairytale when i read it.


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## mazzatelli

BrightGreenGlow said:


> Yeah but you miss out on dividends. 5%p.a is safe.




Oh my, where can I get started with a strategy like this?


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## wayneL

BrightGreenGlow said:


> Once a party exercises their right, the shares are executed... :S seems the same thing to me :S




Not quite.

Execution can refer to any sort of transaction, whether involving options or not. Exercise/assignment refers to the process in the options market that precipitates a transaction.

You will never hear options professionals referring to exercise as execution.

Mazzatelli knows this, because he is an options professional.


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## BrightGreenGlow

mazzatelli said:


> Oh my, where can I get started with a strategy like this?




Put it this way. I believe it works for me and factually it has. Fluke or Fact, either way I enjoying doing it.


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## BrightGreenGlow

wayneL said:


> Not quite.
> 
> Execution can refer to any sort of transaction, whether involving options or not. Exercise/assignment refers to the process in the options market that precipitates a transaction.
> 
> You will never hear options professionals referring to exercise as execution.
> 
> Mazzatelli knows this, because he is an options professional.




Could one, execute an assignment?


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## mazzatelli

BrightGreenGlow said:


> Could one, execute an assignment?




Being assigned is not your choice, so how do you execute it?
How long have you been selling covered calls?


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## Ardyne

Wonder how many people lost money on Babcock and Brown doing covered calls.


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## ParleVouFrancois

Less than they would have otherwise?

That's how covered calls work.

I didn't hold B&B if you're wandering.


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## barney

BradK said:


> Yes and no Barney.
> 
> Writing puts and collecting the premium on stock you want to collect anyway seems like a good little buffer - ie. free money (although arguably not free because you are taking on risk).
> 
> If you were going long on a stock, would you not expect it to be going UP? And what if it fell significantly below the circa 3% you were getting for premium?
> 
> Not silly, but does not take into account major volatility swings.
> 
> I have been out of call writing for 2 years now.





Thanks Brad. Appreciate the volatility aspect ..... perhaps suitable as a "blue chip only" strategy? 



BradK said:


> Following the advice of Jamie McIntyre? Hmmmm... have a long lay down until the thought goes away.
> 
> Brad




Lol .... Point taken.  I read his book years ago and have always thought the concepts made sense, but i guess, like all trading, its fitting the right strategy to the right market/conditions.

Any reference material you guys can recommend for us options newbies (minus the "BS" as Wayne so eloquently puts it 

Cheers.


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## wayneL

BrightGreenGlow said:


> Put it this way. I believe it works for me and factually it has. Fluke or Fact, either way I enjoying doing it.




Of course it works. 

It does exactly what the terms of the contract set out. You take on an obligation to sell shares at a certain price. In return you receive a premium.

The decision for the trader is - is the premium collected worth the risk profile assumed? Is it the best strategy at this time? Sometimes it is, sometimes it isn't.

Covered calls are an excellent strategy, in the right circumstances. But it is only one strategy that is available from several that might be employed.

What puts option people into ridicule and scorn mode are the ludicrous claims made by some larcenous cretins who run seminars... claims such as 5% per month.


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## BradK

wayneL said:


> What puts option people into ridicule and scorn mode are the ludicrous claims made by some larcenous cretins who run seminars... claims such as 5% per month.




BAM! Nail on the head. The options get rich clowns make it sound so easy. It takes a commitment to learn. Remember, that derivatives were created as a protection mechanism, so there are combinations to create wealth, as well as protect wealth - even though you are limiting your profit - hear that Barney? at least you are _in profit_

5% MoM profit is ridiculous. If the options clowns were making that per month they would NOT be working at seminars. There is nothing more pathetic than seeing the same people turn up for the same scam week in and week out and being fleeced. 

Barney, REALLY REALLY REALLY stay away from the Jamie McIntyre types. Take it slowly, put on a few small trades to learn yourself, read posts from Wayne and Maz...  there are some good options books out there for starters including The Art of Options by Christopher Tate. 

Good luck with it. I did very well up until 2007, but have not put on an options trade since.


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## Logique

wayneL said:


> Covered calls are an excellent strategy, in the right circumstances. But it is only one strategy that is available from several that might be employed.



Yes, you are clear-headed on this Wayne and BradK. Pre-2008 I would often write covered calls on ASX100 stocks -it was fine, sometimes you got exercised, sometimes you kept the premium, but overall in a broadly rising market, it was a nice reasonably safe way to earn some beer money. Market conditions were suitable at that time.

But conditions have changed. These days you can deposit money in the bank and get 6%pa+, if you shop around. This is now more attractive, with none of the risk or transaction fees.

Buy puts for downside insurance -sure.  Buy calls to speculate on the upside -sure.

But in these times there is more money to be made in being a stock/sector-picker than in such formulaic high churn bull market strategies as writing covered calls.


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## barney

BradK said:


> BAM! Nail on the head. The options get rich clowns make it sound so easy. It takes a commitment to learn. Remember, that derivatives were created as a protection mechanism, so there are combinations to create wealth, as well as protect wealth - even though you are limiting your profit - hear that Barney? at least you are _in profit_
> 
> 5% MoM profit is ridiculous. If the options clowns were making that per month they would NOT be working at seminars. There is nothing more pathetic than seeing the same people turn up for the same scam week in and week out and being fleeced.
> 
> Barney, REALLY REALLY REALLY stay away from the Jamie McIntyre types. Take it slowly, put on a few small trades to learn yourself, read posts from Wayne and Maz...  there are some good options books out there for starters including The Art of Options by Christopher Tate.
> 
> Good luck with it. I did very well up until 2007, but have not put on an options trade since.




Yeah Cheers Brad. I hear you, and will take that advice on board .... and definitely won't be donating any cash to the "clowns"  I'm more of a "spec"ulator and doing ok at that, but always interested in the mechanics of different methods. All the best.


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## cutz

barney said:


> G'day Wayne, Maz and other option lads ..
> 
> My knowledge on options is very limited so if I use the wrong terminology forgive me , but is the following strategy workable ....
> 
> I like stock XYZ and I think it might be ready to rise
> 
> Instead of buying the stock, I write a put option over the stock and collect x$ premium
> 
> If the stock falls and I get assigned, at least I get a slightly better entry price.
> 
> If I do get assigned, I write a covered call over the stock which gives me a bit more buffer if the SP drops further
> 
> Lets say the stock continues to drop and I want to get out .... Do I have to close the option position first before I can sell the stock, or does selling the stock automatically close the option position as well?
> 
> The concept behind the above strategy would be to continue to write put options and collect x$ premium until assigned, but only on stocks I was happy to own anyway ....
> 
> Is that a valid strategy, and can it be improved on to lower risk ?? ..... Be gentle





Just some thoughts based on general observations,

Works OK if the stock is consolidating or gently moving up, problem is more often than not if a stock corrects enough to take out the strike on your sold put eventually triggering an assignment it generally means that the outlook or fundamentals on the stock has changed.

If you’re lucky the stock will consolidate just below the original put strike, the alternative is the stock will keep plunging.

No amount of call writing may get you out of the drink in a worst case scenario, because now you’re faced with a lose, lose situation, to get decent call premium you need to go close to the money (perhaps well below the strike you were assigned on in the first place).


BTW, selling stock does not automatically trigger anything on the option, in the case of a covered call you are now short calls.


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## BrightGreenGlow

mazzatelli said:


> Being assigned is not your choice, so how do you execute it?
> How long have you been selling covered calls?




Yeah so the person who bought the right to executed.... anyways.

Only 1 year.


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## wayneL

What is the trader trying to achieve by trading the synthetic naked put, AKA covered call. Here's something I wrote a little while ago as a thinking exercise on this risk profile:



> As we have discussed in the preceding days, a naked put is equivalent to a covered call, vis a vis, a covered call is a synthetic naked put.
> 
> The main problem seems to be with the thinking, the psychology around this strategy.
> 
> We know that we can create a synthetic long stock position with options, by buying a call and selling a corresponding put, so we can look at any stock position as having a long call and short put embedded within it.
> 
> We can then analyze the naked put option as a long stock position with the short call stripped out leaving only the short put. A covered call can be looked at precisely the same way, as you have long stock with the long call component stripped out, buy writing (selling) the call leaving only the short put, albeit synthetically.
> 
> Why would an investor/trader do this?
> 
> By implication, the investor is dodging the cost of buying unlimited upside (the call option premium) and electing to collect the premium available in the short put. He is implying that he doesn't believe the stock is going to appreciate in value more than the strike price, plus what the put option premium is going to deliver in the time to expiry. If he does believe the stock is going higher than that point, he is short changing himself.
> 
> He also (by implication) doesn't believe the stock is going to fall by more than the strike price plus premium collected, otherwise just stay out, or use a different strategy. However if the stock does fall past this point, at least the loss is less than long stock.
> 
> It is a bet that the stock price is going to stay in a range.
> 
> 
> 
> 
> 
> 
> 
> Obviously, the put premium has to be adequate recompense for the risk taken, measured against the probability of such moves occurring in the time frame.
> 
> There is no new information there and this is all pretty obvious stuff for those with a good grasp of synthetics, but I thought it was an interesting way of looking at these two strategies, and a good way for people whose thinking has been confused by definitive statements that aren't consistent with reality.
> 
> Once again, there are various reasons people want to trade the naked put and it's synthetic equivalent (covered call) which may or may not be optimum for their purposes and there are other strategies from which to select. I'm not promoting this as a good or a bad thing. It's just an exercise in understanding.


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## mazzatelli

BrightGreenGlow said:


> Put it this way. I believe it works for me and factually it has. Fluke or Fact, either way I enjoying doing it.





> It is sad that alot of people seem to believe that that being  smart equals making profits. See, I'm smart to know that it is not true.
> fyi, the trade in question ended up being profitable



The second quote isn't attributed to you, but to a former member on the forum. They played against upside dgamma curvature - funnily enough made money for many months, before a large hit took out their account.

Whether intentional or not, I find it "ingenius" that seminar clowns have latched onto a strategy that can give someone a nice run of wins - providing false confidence . When the big hit comes - they put it down to "poor risk management" on the practitioners part.

It's a pity, Wayne & sails have explained and dissected the topic so many times - people either don't understand or don't want to.


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## BrightGreenGlow

This is true...

However. How do I whipe out my account if I only use covered calls?

I collect dividends, collect a premium and sometimes I have to sell my shares at a lower price. Therefore, yes I could be making more money, however I enjoy $500 a month and like holding the shares like ANZ/BHP that I do calls with.

Sure selling and buying at the correct times may be more profitable but I'll never be in the position of owing people money. I'll only ever limit my profit.

I understand their points of view also and value them. This is my style of trading and I like it.


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## nunthewiser

Can you give me step by step instructions on where i start in this method if i hold bluechip shares John , as in who do i call ? how do i write such a thing? where do i get my profits from , who do i pay if it goes wrong etc ? what brokers offer this service etc etc ?

I trade other instruments not actual options so am genuninly intrested in other methods


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## BrightGreenGlow

I dunno if you're being sarcastic or not but Ill tell you guys what I do and hope I don't get laughed at....

I like to write calls on blue chips due to more people wanting to buy them.

I use commsec and they will charge around $35 per option transfer.

I like to use atleast 2 option contracts per transfer so I only get charged that $35 brokerage once.

I normally wait until the 2nd week in the month and start looking for a black day to get the best premium for the call on the market. 2nd week because you only have to wait around 10 trading days until the option contract expires. Normally the price of the premium will not move down much in the first 2 weeks.

If I have 2 ANZ options contracts to sell and ANZ is currently at $24 with 10 trading days to go I'll aim for around the $24.50 or $25 strike price. 25 is safer but you'll receive a smaller premium than the 24.5 strike price.

You don't have to pay anyone and the person who buys the contract off you pays you the premium at T+1.

Nearly all brokers will offer options.
-------
No another note, if you like to hold stock for the yield why the heck wouldn't you write calls??? even if you write calls and only receive $100 a month for a call that would realistically never be "EXERCISED".

Im only really a newbie at this but I've made a few grand off options so far and completely no downside. so far...


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## nunthewiser

No not being sarcastic.

i have never taken the time to look into them

cheers


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## cutz

nunthewiser said:


> No not being sarcastic.
> 
> i have never taken the time to look into them
> 
> cheers




Check them out nun,

Options are way cool.


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## nunthewiser

cutz said:


> Check them out nun,
> 
> Options are way cool.




As long as it dont interfere with my my fornicating and drinking time i may well have to


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## wayneL

BrightGreenGlow said:


> I dunno if you're being sarcastic or not but Ill tell you guys what I do and hope I don't get laughed at....
> 
> I like to write calls on blue chips due to more people wanting to buy them.
> 
> I use commsec and they will charge around $35 per option transfer.
> 
> I like to use atleast 2 option contracts per transfer so I only get charged that $35 brokerage once.
> 
> I normally wait until the 2nd week in the month and start looking for a black day to get the best premium for the call on the market. 2nd week because you only have to wait around 10 trading days until the option contract expires. Normally the price of the premium will not move down much in the first 2 weeks.
> 
> If I have 2 ANZ options contracts to sell and ANZ is currently at $24 with 10 trading days to go I'll aim for around the $24.50 or $25 strike price. 25 is safer but you'll receive a smaller premium than the 24.5 strike price.
> 
> You don't have to pay anyone and the person who buys the contract off you pays you the premium at T+1.
> 
> Nearly all brokers will offer options.
> -------
> No another note, if you like to hold stock for the yield why the heck wouldn't you write calls??? even if you write calls and only receive $100 a month for a call that would realistically never be "EXERCISED".
> 
> Im only really a newbie at this but I've made a few grand off options so far and completely no downside. so far...



That's all fine (though I think the approach could be improved). If you are holding the shares anyway, and you don't think the sp is going to blast through your strike, it's a good strategy.

One point though - TAX.

It is probably better that you dodge assignment to dodge possible CGT if applicable. There is no reason to sit there like a stunned mullet with an ITM covered call. You can simply trade out of it before expiry.

Yes you might be losing money on the call, but the net result is the same, without precipitating a CGT event.


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## BrightGreenGlow

wayneL said:


> That's all fine (though I think the approach could be improved). If you are holding the shares anyway, and you don't think the sp is going to blast through your strike, it's a good strategy.
> 
> One point though - TAX.
> 
> It is probably better that you dodge assignment to dodge possible CGT if applicable. There is no reason to sit there like a stunned mullet with an ITM covered call. You can simply trade out of it before expiry.
> 
> Yes you might be losing money on the call, but the net result is the same, without precipitating a CGT event.




Yes this is true. If im a few months away from holding the shares for a year I'd be pretty hesitant to write a call due to CGT. But like you said if you're holding the stock its a good little money maker.


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## village idiot

wayneL said:


> The decision for the trader is - is the premium collected worth the risk profile assumed?




this is the guts of the whole thing, and wayne also correctly states somewhere else that the premium has to be compared to the probability of various outcomes, or in other words the anticipated distribution of share price returns over the time till expiry, to determine whether writing this call at this time for this premium has a positive expected value, or a higher expected value than whatever the alternative is (presumably continue to hold the stock).

here is a chart of a very crude method of comparing the cc strategy to a buy and hold strategy; the share is NAB and the period is feb 2003 to may 2010

the thick blue line represents the difference in returns ie the improvement or other wise  between always being short a call over 100% of the stock v a simple buy and hold stategy

the calls measured are all 20 trading day duration and in this chart i have assumed a constant 3% premium is obtained, which is equivalent to an IV of 26%








all good eh in this case since buy and hold has produced a negative return, writing calls has improved the return considerably.

now  this is the same chart but i have changed the premium recieved each time to 2% which equates to an IV=16.5%;






different story now we are only getting 2%, which appears to be around the equilibrium point where the two strategies are roughly equal


now I of course know that the premium is never a constant and indeed it fluctuates a lot (i did say it was a crude analysis) but the point is that IT DEPENDS HOW MUCH YOU GET for assuming that obligation. 

That is to say, you should not just decide that writing calls is a great strategy and just blindly write call after call without considering the level of premiums available v the distribution of possible outcomes. Or in other words comparing IV to expected volatility. Or to shorten it some more; sell premium when IV is higher than expected volatility.


now here is another one with completely diffrent price behaviour. This time the stock is BHP which has roughly quadrupled in price over the same time. in BHP writing calls at 26% IV would have resulted in severely curtailing the capital growth that buy and hold enjoyed. 






now i change the premiums recd to an unlikely 5% and this chart shows that IF YOU GET ENOUGH premium writing calls can have a + EV even on a rising stock.






Personally i am a fan of writing calls on blue chip stocks that i hold and am happy to hold for the long term, but always subject to the IV available and the stocks position its own range.  It doesnt get mentioned often but another variable you can influence is you can vary the ratio between stocks held and options written. depending on circumstances i may write calls on between 50% and 200% of stock held, which has a big influence on the payoff profiles

I am also a fan of writing puts as an accumulation and trading strategy, if circumstances are appropriate, and if i can get them on the same stock as we are short a call on at different points in its trading range so much the better.

One thing i wouldnt ever do is buy stock and write a call at the same time ie buy/write. If i wanted to assume that payoff profile i would instead write a naked put - same payoff, less capital tied up. 

also agree with wayne that stocks with a high IV generally have a good chance of a big move either way, and these are the least appropriate for doing a buy/write on due to the unfavourable risk:reward ratio (ie small win or big loss). For me, i stick  to blue chips for this stategy


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## wayneL

Here is an interesting comparison:

The CBOE has an SP500 buy/write index which I've plotted with the SP500.

I has outperformed a bit since "the troubles" because of the general overpricing of volatility since then, but previous to that, not a lot of difference.


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## mazzatelli

village idiot said:


> also agree with wayne that stocks with a high IV generally have a good chance of a big move either way, and these are the least appropriate for doing a buy/write on due to the unfavourable risk:reward ratio (ie small win or big loss).




If you put a gun to my head, I'd rather sell vol in a more volatile stock than a quiet one.

Funnily enough, relating to Wayne's comment about overpricing of vol.
Paradox, perhaps?


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## ENP

Wow, those graphs and charts are fantastic at explaining exactly what I was looking for!!

Thanks everyone.


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## wayneL

ENP said:


> He says he earns 5% return per month. This basically equates to about a 70% return every year. He says he spends 15 mintues per month actively doing it.
> 
> I mean 70% return with "no risk" is this guy for real? If it's this easy why doesn't everyone do it?
> 
> Look forward to your *honest * opinions on the subject.
> 
> Thanks.




Note that the charts scupper the _x_% per month fallacy. 

CCs written on sp500 would be in overall loss over the last two years and up only 10% over 5 years.


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## ENP

wayneL said:


> Note that the charts scupper the _x_% per month fallacy.
> 
> CCs written on sp500 would be in overall loss over the last two years and up only 10% over 5 years.




I just forwarded the link to his email and he replied with...

"that'd be depressing if you were writing covered calls that badly!!! don't know of anyone that writes them on the S&P... perhaps for good reason - small yield?"


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## wayneL

ENP said:


> I just forwarded the link to his email and he replied with...
> 
> "that'd be depressing if you were writing covered calls that badly!!! don't know of anyone that writes them on the S&P... perhaps for good reason - small yield?"




As with most beginners sold a story, your friend misses the point. Unfortunately, he will have to learn the hard way.


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## village idiot

that is indeed an interesting chart wayne, I didnt know that index existed but now i know something i didnt before and that is never a bad thing.....

my read from that chart would be that basically all the out performance was in the bear market from 2008 thru early 2009, which is as you would expect since one of the undoubted characteristics of call writing is it does provide a smallish cushion against a drop in sp, and is supposed to outperform buy and hold any time the sp falls. 

the rest of the time was essentially in uptrends when the strategies are evenly matched, again as you would expect if the slope of the uptrend matches the level of premiums....


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## village idiot

mazzatelli, am i reading your reply right in meaning that you would need a gun held to your head to sell premium at all?

if so, what strategies are you into if you dont mind me asking...


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## ENP

wayneL said:


> As with most beginners sold a story, your friend misses the point. Unfortunately, he will have to learn the hard way.




You seem to be pretty onto in Wayne, what is your past experience? Basically what are your credentials and why should I take your opinion?

(not trying to down talk you, just wanting to know a bit about your experience with these types of investments)

Thanks,


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## wayneL

ENP said:


> You seem to be pretty onto in Wayne, what is your past experience? Basically what are your credentials and why should I take your opinion?
> 
> (not trying to down talk you, just wanting to know a bit about your experience with these types of investments)
> 
> Thanks,




I have no credentials but trade an option or two.

You shouldn't take my opinion as gospel, but analyse what I say for integrity, accuracy and logic, then make up your own mind.


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## mazzatelli

village idiot said:


> also agree with wayne that stocks with a high IV generally have a good chance of a big move either way, and these are the least appropriate for doing a buy/write on due to the unfavourable risk:reward ratio (ie small win or big loss). For me, i stick  to blue chips for this stategy






village idiot said:


> mazzatelli, am i reading your reply right in meaning that you would need a gun held to your head to sell premium at all?
> 
> if so, what strategies are you into if you don't mind me asking...




No, I'm suggesting that the "riskier" the trade, the better the risk:reward ratio is priced. Why do you think perceived "safe" otm credit spreads have such poor risk reward?

Perceived risky equities, tend to have overpriced equity risk premium built in. Low IV stocks - you're never compensated enough premium when they explode. 

I trade vol [tenor, skew, expected] and direction - the spread/structure is contingent on what I am trying to capture.


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## village idiot

ok, for the high vol stocks  I was thinking along the lines of pharmas, or oil companies with 1 exploration well,  which can be made or broken by one decision. sure you might get 10% as a premium but if the stock can halve or double within the option period your risk;reward is still say 50%:10% , which is in the same ballpark as OTM credit spreads? (and ok you could make the same case for low and mid IV stocks)


admittedly i havent studied the behaviour of those high IV stocks much recently so i could have it wrong. I do remember getting my **** kicked though some years ago when starting out, by writing options on the highest IV stocks i could find...........

fwiw i also think the very low IV stocks dont offer enough premium to make it worth while selling. i should change that line of my post to "blue chip stocks with IVs at the higher end of the blue chip IV range"

edit; and up to and including eg FMG


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## mazzatelli

village idiot said:


> admittedly i havent studied the behaviour of those high IV stocks much recently so i could have it wrong. I do remember getting my **** kicked though some years ago when starting out, by writing options on the highest IV stocks i could find...........
> 
> fwiw i also think the very low IV stocks dont offer enough premium to make it worth while selling. i should change that line of my post to "blue chip stocks with IVs at the higher end of the blue chip IV range"




Profiling price behaviour, identical stat vol
https://www.aussiestockforums.com/forums/showpost.php?p=496787&postcount=54

I had in mind GOOG [~35%] and MCD [~15%] with approx $32 and $2.50 in $prem respectively [replicating atm vols]. MCD can be considered blue chip and quieter than GOOG, but $2.50 doesn't leave much margin for error.
I'm not advocating sell GOOG premium, but I'd rather vol where I feel there is overpriced risk premium.

For pharma, biotech etc vol/Px is contingent on announcements [FDA approvals, deals] - you're entering merger/risk-arbitrage territory. It's a different game.

Risk:reward/trade - generally the less likely you will receive a payout, the better the risk:reward ratio is priced. e.g. lotto
Whether you realize enough reward > risk over the long run is another issue. The latter is what I think you are trying to say about ridiculously high IV targets.


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## wayneL

mazzatelli said:


> I had in mind GOOG [~35%] and MCD [~15%] with approx $32 and $2.50 in $prem respectively [replicating atm vols]. MCD can be considered blue chip and quieter than GOOG, but $2.50 doesn't leave much margin for error.
> I'm not advocating sell GOOG premium, *but I'd rather vol where I feel there is overpriced risk premium.*




Exactly!!!

So many punters chase big premium without ever relating it to the actual risk.

Often the biggest premiums available underprice risk, and this is where punters come unstuck.... fda approvals and whatnot.


Reasons To NOT Chase Big CC Premium

Reasons To Not Chase Big CC Premium - REVISITED

Reasons To Not Chase Big CC Premium - RE - REVISITED


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## village idiot

mazzatelli said:


> Whether you realize enough reward > risk over the long run is another issue. The latter is what I think you are trying to say about ridiculously high IV targets.




yeah i think we're all on the same page here, just got sidetracked by the risk:reward thing

in any trade there is a range of outcomes and a probability and a payoff for each of those outcomes and the combination of all those outcomes adds up to the expected value, which is all that counts really. not the risk;reward ratio per se

and + EV, (which is basically the same thing as the risk being overpriced if talking about selling premium) can be found in various places, not just one end or other of the spectrum.


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## village idiot

right now is a good example of *not* ideal conditions for writing calls/puts....

i just had a few short options expire (generally worthless), and looking around i cant find anything attractive enough to be worth writing;

stock	option	Previous IV 	IV now


NAB	call + p          27% and 30%	    19%
ANZ	put	         around 27%	     20%
WDC	put	         25%	     17%
BHP	call	         28%	     19%
WOW	spread	         not sure	     13%


any lower and i might have to start buying them....

WOW options looking very underpriced at the moment compared to the measure of volatility i use or probably any other measure


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## wealthstudent

ENP said:


> Well I'm not sure exactly how he does it, he just told me the basics.
> 
> He has a personal loan of $10k and I just checked the interest rates on them of 18% p/a.
> 
> So the 5% per month is probably before commission, fees, losses, tax, etc, etc?




Hello again ENP,
I've just purchased the Sharelord product from the Financial Freedom Institutre. I completed the training yesterday. Now I'm a complete newbie here and this thread conversation has been quite extensive in it's discussion on share renting. 
So let me share with you what I know based on the Sharelord training. The average returns that is marketed by the Financial Freedom Institute is between 3%-7% per month. These returns are net of the put option or insurance. But they exclude brokerage costs.
There are always risks involved with ANY share trading. The put options can insure part but not all of your capital investment. From what I've seen, you can insure between 90% to 95%. If you're willing to take a 5%-10% downward risk, that's your decision. 
With Sharelord, you write a covered call with U.S. Shares only.
I made my first paper trade today. I'll let you know how I go.
All the best,
M


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## wayneL

I give up.


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## mazzatelli

wealthstudent said:


> Now I'm a complete newbie here and this thread conversation has been quite extensive in it's discussion on share renting.
> The average returns that is marketed by the Financial Freedom Institute is between 3%-7% per month. These returns are net of the put option or insurance. But they exclude brokerage costs.
> There are always risks involved with ANY share trading. The put options can insure part but not all of your capital investment. From what I've seen, you can insure between 90% to 95%. If you're willing to take a 5%-10% downward risk, that's your decision.








​


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## builder2818

wayneL said:


> I give up.




LOL! There needs to be a section in the forum that all these seminar attendees can discuss their strategies and plans to quit their day jobs and live off credit while writing covered calls and selling short puts.

Perhaps a sub section within the beginners lounge? Their posts may just go unanswered that way. Wouldn't want to take anything away from their $5000+ course support groups.


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## BradK

wayneL said:


> I give up.




They'll be back... in six months. Try again then. 

Cheers
Brad


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## brty

wayneL said:


> I give up.




Wayne, don't let the marketers win, use cut and paste from some of your earlier very good replies.

brty


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## BrightGreenGlow

Hahahaha, now I'm all for covered calls for the right stocks at the right time and for the right price.... but that 3-7% per month is CRAP.

PS: Did I mention I like covered calls


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## wayneL

I don't really give up...

_we shall fight on the beaches, 
we shall fight on the landing grounds, 
we shall fight in the fields and in the streets, 
we shall fight in the hills; 
we shall never surrender._

I am just continuously amazed at the lack of simple arithmetic skills that blow the _x_% per month (which has steadily increased over the years to even more absurd levels) myth out of the water. 

And they keep coming at us like a zombie army... 'cept they all wear silly grins and regurgitate the "wealth" industry language like they've just signed up to Amway.

And FFS, the next person that refers to covered calls as share renting will be tracked down and be subjected to much unpleasantness.


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## Ruby

wealthstudent said:


> Hello again ENP,
> I've just purchased the Sharelord product from the Financial Freedom Institutre. I completed the training yesterday. Now I'm a complete newbie here and this thread conversation has been quite extensive in it's discussion on share renting.
> So let me share with you what I know based on the Sharelord training. The *average returns that is marketed by the Financial Freedom Institute is between 3%-7% per month. *These returns are *net of the put option *or insurance. But they exclude brokerage costs.
> There are always risks involved with ANY share trading. The put options can insure part but not all of your capital investment. From what I've seen, you can insure between 90% to 95%. If you're willing to take a 5%-10% downward risk, that's your decision.
> With Sharelord, you write a covered call with U.S. Shares only.
> I made my first paper trade today. I'll let you know how I go.
> All the best,
> M




I have avoided this thread to date because I no longer trade options and have forgotten much of what I knew, but have now decided to add my contribution.   I fully endorse the comments of the obviously experienced options traders who have posted here.  

To suggest that you can make *average *returns of 3% - 7% per month, *net of the put option *for insurance, on covered call writing is absolute nonsense.  Some years ago I was writing covered calls, and doing it very successfully for a while.  Sure, I made 8% some months - but that was if I didn't buy a put option (foolish I know!); other months I was exercised or had to close my position at a loss.   

People like Jamie McIntyre and Nik Haluk (FFI - Sharelord) make it all sound so easy, but in fact options trading is complex and should not be indulged in without gaining a lot of knowledge about the subject first.  And it you are doing it with borrowed money you will find the interest and expenses will eat up all your profits.

I will be interested to hear how your real trading (not your paper trading) goes!

Cheers,

Ruby

(My bolds in quoted text)


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## Ruby

I should have added that I think writing covered calls is a great strategy, IF you own the underlying stock, IF you know what you are doing, and IF the market conditions are right, which is not always the case.


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## malachii

At least he's paper trading.  The $5000 maybe small change if he live trades with the limited info has has now.

malachii


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## mazzatelli

wayneL said:


> And FFS, the next person that refers to covered calls as share renting will be tracked down and be subjected to much unpleasantness.




lolol
I also despise reference to the long put leg of a bull put vertical [or synthetic] as insurance. May we add this to the list? :


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## BradK

wayneL said:


> And FFS, the next person that refers to covered calls as share renting will be tracked down and be subjected to much unpleasantness.




Are you suggesting that men in balaclava's should subject Jamie McIntyre types to sustained sexual violence? It's just not the way forward! 

Brad


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## wayneL

mazzatelli said:


> lolol
> I also despise reference to the long put leg of a bull put vertical [or synthetic] as insurance. May we add this to the list? :




YES!!


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## wayneL

BradK said:


> Are you suggesting that men in balaclava's should subject Jamie McIntyre types to sustained sexual violence? It's just not the way forward!
> 
> Brad




I am open to suggestions.


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