Covered Calls
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If you are serious about options trading/writing, you have to ask yourself "what if I'm wrong?" Looking at the covered call and the naked put risk graph, you stand to lose a hell of a lot if you were dead wrong in picking the market direction (bullish or bearish). Covered call has unlimited risk (stock drops to zero) and limited reward (strike price minus stock price when you initiated the short call plus the premium received). Naked put has unlimited risk to infinity (if stock price gaps up = margin call) and limited reward (premium received).
Cheers,
J.
Cheers,
J.
Holding stock and writing calls in a bear market is a loosing strategy because the stock generally looses value more then what the call is worth.
For me i have to make up my mind 1/ do i want to be an option trader or 2/ a share trader.
Combining both and holding stock (when it shouldve been stopped out) for the sake of the covered call is not good.
And the opposite is the same writing a covered call when the share is rallying.
I have NWS shares at the moment and will not write 20 contracts and lock myself in.
My real world experience of covered calls .Ive written 20x covered calls chasing NCP and WOW down in the past trying to cover the share loss with call premium ....ive also written 20x covered calls in front of a rallying NCP that i ended up buying back at a loss and then made up on the share trade (sell) ..
The result was not worth it, the theory in all the books looks wonderfull though ;-)
For me i have to make up my mind 1/ do i want to be an option trader or 2/ a share trader.
Combining both and holding stock (when it shouldve been stopped out) for the sake of the covered call is not good.
And the opposite is the same writing a covered call when the share is rallying.
I have NWS shares at the moment and will not write 20 contracts and lock myself in.
My real world experience of covered calls .Ive written 20x covered calls chasing NCP and WOW down in the past trying to cover the share loss with call premium ....ive also written 20x covered calls in front of a rallying NCP that i ended up buying back at a loss and then made up on the share trade (sell) ..
The result was not worth it, the theory in all the books looks wonderfull though ;-)
Forgot ..some people say that covered calls are good when the share is trending sideways. Hindsight is a wondefull thing as well.
Normally to get decent premium you have to write >8 weeks out or go close to the money with a smaller time frame.
To predict that a share will trend sideways for 8 weeks is well very optimistic, especially trying to get max premium at the same time.
Thats my experience anyway.
Normally to get decent premium you have to write >8 weeks out or go close to the money with a smaller time frame.
To predict that a share will trend sideways for 8 weeks is well very optimistic, especially trying to get max premium at the same time.
Thats my experience anyway.
a lot of stocks have traded sideways for 5 years. CBA, NAB, RIO, TLS, QAN......covered calls on these would have been very profitable.
A bear market does not mean prices are falling. It means they are not in a bull market, signified by new all time highs.
A covered call strategy has LESS risk than a naked normal position, since the option premium is a buffer.
A bear market does not mean prices are falling. It means they are not in a bull market, signified by new all time highs.
A covered call strategy has LESS risk than a naked normal position, since the option premium is a buffer.
You can fix your support resistance levels as far away from the real rpice to get a "trading sideways" definition. Writing covered calls to obtain decent premium.
Have you actually bought and written covered calls on NAB? What was your buy price? Whats series did you write?
A bull put spread in my opinion is less "risky" then a covered call trumped out by all the books.
Have you actually bought and written covered calls on NAB? What was your buy price? Whats series did you write?
A bull put spread in my opinion is less "risky" then a covered call trumped out by all the books.
crashy said:
NAB trading sideways for the last 5 years, pretty large range for a "sideways move" definition. for example NAB last 5yrs low $22.05 - high $36.62. Include a large series of swings during that whole period. So my point is you shouldve been stopped out on the share ( if you applied stops) or exercised on your call.
Have you actually traded and written covered calls on NAB?? What was your buy price? Whats series did you write? How did you trade the last 6 months whilst it was "trading sideways"? Did you apply stops when it was in free fall from the 13th June ($30.98) - 12th August ($26.08).
Whats your strategy now to trade NAB now that it has moved into the middle of your trading range?
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Superted said:
Agreed 100%. Even a calendar spread if there was sufficient volatility skew would be a hell of a lot better than the c/c strategy.
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Crashy-
Can you give an explanation of a Bull Spread and it's application, how about a "Protected Buy/Write" in laymans terms..
sorry if the question seems a bit basic..
The Barbarian Investor
Can you give an explanation of a Bull Spread and it's application, how about a "Protected Buy/Write" in laymans terms..
sorry if the question seems a bit basic..
The Barbarian Investor
wayneL
VIVA LA LIBERTAD, CARAJO!
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The Barbarian Investor said:
Hey barb, it was Superted who mentioned the spread.
It was also Ted who said the most profound statement in this whole thread;
"For me i have to make up my mind 1/ do i want to be an option trader or 2/ a share trader. "
Cheers
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Protected Buy/Write
1. Buy 1000 shares
2. Sell Out of the Money Call with short term expiry < 45 days to expiration
3. Buy At the Money Put or Slightly Out of the Money Put with long term expiry > 90 days to expiration
4. Attempt to roll the short calls every month
Bull Put Spread
1. Sell Higher Strike Put
2. Buy Lower Strike Put
3. Same expiration dates
E.G.
You are bullish on NAB which is trading at $27.00. You think that it will close above $27.00 by end of January.
Sell 1 Jan 2005 $27.00 Put @ $2.00
Buy 1 Jan 2005 $25.00 Put @ $0.50
For Net Credit of $1.50
Your aim is for both put options to expire worthless so you get to keep the Net Credit.
Max Risk - Difference in Strikes less Net Credit: $27 - $25 - $1.50 = $0.50
Max Reward - Net Credit = $1.50
Share price for Break even at expiration - Higher Strike less Net Credit: $27 - $1.50 = $25.50
You are risking $0.50 to make a possible $1.50 - Limited Risk Limited Reward
Cheers,
J.
Thanks for doing that J (saved me typing ;-)
Barb,
There is a lot of info here:
http://www.asx.com.au/markets/l4/OptionBooklets_AM4.shtm
Barb,
There is a lot of info here:
http://www.asx.com.au/markets/l4/OptionBooklets_AM4.shtm
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Thanks Guy's
The Barbarian Investor
The Barbarian Investor
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Anytime mate.Superted said:
Are you actively trading the options market?
Cheers,
J.
Hi all,
It has been interesting reading this Thread on Covered Calls, with comments like, "do you want to be a Share Trader or an Options Trader".
Personally I enjoy doing both. The way I see it is that if I have bought a Share for the long term, then why not make some extra income by Writing Covered Calls against it. I have found that I can safely Write at least 8-10 months of the year, earning at least 2% each Month. If the Share price rises and you are in danger of being Exercised, then you can always Buy back your position and Write again at the next Strike. If that happens then I will usually do a 2:1 Ratio Write.
I realise that to make it a viable exercise you need a reasonable amount of Shares to Write against, otherwise you are just making the Brokers rich.
It has been interesting reading this Thread on Covered Calls, with comments like, "do you want to be a Share Trader or an Options Trader".
Personally I enjoy doing both. The way I see it is that if I have bought a Share for the long term, then why not make some extra income by Writing Covered Calls against it. I have found that I can safely Write at least 8-10 months of the year, earning at least 2% each Month. If the Share price rises and you are in danger of being Exercised, then you can always Buy back your position and Write again at the next Strike. If that happens then I will usually do a 2:1 Ratio Write.
I realise that to make it a viable exercise you need a reasonable amount of Shares to Write against, otherwise you are just making the Brokers rich.
its best to do a buy write on low priced shares.
with stocks like TLS and QAN ts easy to buy another 1000 shares so that you can write an extra contract. try doing that with RIO!
TOTALLY dissagree with the statement "do I want to be a share trader or an option trader".
buy-write is one of about 50 strategies you can use to improve returns. why not try a few others?
with stocks like TLS and QAN ts easy to buy another 1000 shares so that you can write an extra contract. try doing that with RIO!
TOTALLY dissagree with the statement "do I want to be a share trader or an option trader".
buy-write is one of about 50 strategies you can use to improve returns. why not try a few others?
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Thanks again, i find the subject of options interesting and am trying to learn as much as possible.
Positive cashflow-
No not trading options at this stage, however the concept to me, has merits. I'm definetly a bird in the hand is worth two in the bush kinda person and the concept of potentialy earning monthly premuims from your shares appeals to me.
I don't have an emotional attachment to them and if i have to sell the contract when exercised (earning a premuim, plus additional value of the share)or buy them back at a reduced price to close my position would also not matter as long as i made profit.
Crashy-
In the current marketplace then, what would you percieve to be worthwhile strategies?)
Thinking along the terms of your positive cash flow/ geared strategies.
I used to be a set 'n' forget investor or buy 'n' hold and find the different trading concepts fascinating, as i still now people who have held thier shares for years, some worth less now then when they originally bought them..
The Barbarian Investor
Positive cashflow-
No not trading options at this stage, however the concept to me, has merits. I'm definetly a bird in the hand is worth two in the bush kinda person and the concept of potentialy earning monthly premuims from your shares appeals to me.
I don't have an emotional attachment to them and if i have to sell the contract when exercised (earning a premuim, plus additional value of the share)or buy them back at a reduced price to close my position would also not matter as long as i made profit.
Crashy-
In the current marketplace then, what would you percieve to be worthwhile strategies?)
Thinking along the terms of your positive cash flow/ geared strategies.
I used to be a set 'n' forget investor or buy 'n' hold and find the different trading concepts fascinating, as i still now people who have held thier shares for years, some worth less now then when they originally bought them..
The Barbarian Investor
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