Options Trading/Covered Call Education - Recommendations?

I'm sure this has been posted many times before but I cant seemd to find the threads. I'd like to get some quality education and would love to hear from others who are in the game as to where they would go to get this. I'm looking to learn good capital protected / risk managed stratergies. As a start (with the current correction in mind) I was considering buying fundamentally strong stocks and writing calls on them. I realise that this will limit the upside potential, but the cashflow will be useful when paired to my other investments.

Mark Wolfinger, "Create Your Own Hedge Fund - Increase Profits and Reduce Risks with ETFs and Options" (2005)

Seeking Truth said:

As a start (with the current correction in mind) I was considering buying fundamentally strong stocks and writing calls on them. I realise that this will limit the upside potential, but the cashflow will be useful when paired to my other investments.

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There are funds listed on the ASX that do this and you can see they suck. If they can't do it well, what makes you think you'll be any more successful?

Here are the returns of covered call fund in the US vs US index over 5 years...

InsvestoBoy said:

Here are the returns of covered call fund in the US vs US index over 5 years...
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Agree with InsvestoBoy,

Bull market between 2016 and 2020 coupled with historically low IV's made for dismal Covered Call returns. Things have changed since the recent meltdown, IV's are pumped up and a Covered Call strategy as part of a buy and hold portfolio is looking pretty attractive.

Thank you for those replies, and thanks Warr87 I'll look at getting a copy of that. I got to admit InsvestoBoy, that doesn't look pretty. Hard to believe that that fund can lose money over that period of time when the market has been relatively strong. Worse results than buy and hold.....
Cutz - agreed, this stratergy clearly works in a high IV environment, although I am surprised it doesn't work once things go bullish.

Seeking Truth said:

Cutz - agreed, this stratergy clearly works in a high IV environment, although I am surprised it doesn't work once things go bullish.

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Hi.

Because in a bull market / low IV environment, call option writers tend to sell close to the money to get decent premium, call selling pressure is what drives premiums down, call assignment is what caps profits on the bought stock, i'm not sure how Covered Call funds work, it seems the options are not managed ie. buy/write/assign as opposed to buy/write/diagonal roll..

Seeking Truth said:

Hard to believe that that fund can lose money over that period of time when the market has been relatively strong. Worse results than buy and hold.....

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The chart is relative performance of the fund vs the index. It doesn't show the fund losing money, it does show the fund had worse results than buy and hold.

cutz said:

IV's are pumped up and a Covered Call strategy as part of a buy and hold portfolio is looking pretty attractive.

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If high IVs are what makes a CC strategy look attractive, why has HSPX:SPY ratio suffered the worst returns recently as SPX VIX traded down from 80 to 40?

InsvestoBoy said:

If high IVs are what makes a CC strategy look attractive, why has HSPX:SPY ratio suffered the worst returns recently as SPX VIX traded down from 80 to 40?

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Hi.

I've got no idea how the HSPX implements it's Call strategies, never looked at it. Are they selling front month ATM Calls against SPX futures ? Are the option positions actively managed, rolled down into a correction ? In a rally rolled diagonally prior expiry or allowed to be assigned ?

Personally the latter is not how I manage my Calls which I write against my portfolio holdings, I prefer to create Bear Calls / Backspreads depending on conditions, this is the protection from assignment, premium is sacrificed then tweeked as required.

cutz said:

Hi.

I've got no idea how the HSPX implements it's Call strategies, never looked at it. Are they selling front month ATM Calls against SPX futures ? Are the option positions actively managed, rolled down into a correction ? In a rally rolled diagonally prior expiry or allowed to be assigned ?

Personally the latter is not how I manage my Calls which I write against my portfolio holdings, I prefer to create Bear Calls / Backspreads depending on conditions, this is the protection from assignment, premium is sacrificed then tweeked as required.

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I guess what I'm getting at is that it isn't high IVs in and of themselves that make a CC strategy attractive...otherwise you'd see it in the returns of a naive CC strategy.

Rather, the most you can say is that low IVs make a CC strategy explicitly unattractive.

@Seeking Truth I was looking around yesterday at some stuff and stumbled back across one of the funds that does this CC stuff.

Djerriwah Investments, part of the Australian Foundation Investments family I think, along with AFI and Mirrabooka (small caps).

This is their performance vs benchmark going back 15 years



They use an active approach to determine how much optionality to sell, etc with a max cap of 50% coverage...and the result still seems to suck just about as much as a naive approach.

If these guys can't do it well, why does anyone think they can do it better?

Curious to hear any thoughts from @cutz or @Sharkman are you guys out there outperforming this fund?

InsvestoBoy said:

Curious to hear any thoughts from @cutz or @Sharkman are you guys out there outperforming this fund?

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not really comfortable with posting broker statements for privacy reasons (plus i'd have to sift thru hundreds of trades and sort them into which ones are covered calls and which ones fall under other strategies, don't have an easy way to do that in my spreadsheet), so i'm not asking people to believe me - after all, i've always taken the "broker statements, or it didn't happen" view myself.

it's also a bit tricky to do a like vs like comparison because i generally don't do covered calls in isolation - i'll sell puts to take delivery of something before it goes ex-div, strip the div plus the franking credits (and i probably have an advantage over the fund there, as i trade thru a corporate trust and distribute the divs to low tax bracket beneficiaries who then claim most or all of those franking credits back) and only then sell covered calls to try and get rid of the stock after stripping the div.

to be honest i wouldn't have beaten the accumulation index by much (if at all) on my options trading arm - but that would also include long gamma trades, which i haven't done very well at over the years. i don't have an easy way of stripping out the long gamma stuff with the way i've set up my records, but i would estimate that if i did so, and included the whole strategy (sell puts, strip the div, claim the franking credits, sell covered calls) i'd be ahead of this fund by a modest margin. also as i've mentioned in other topics, i've hardly done any trades in the last 2-3 years because too busy with my day job.

@Cam019 's recent topic about how much alpha is needed to justify effort spent is rather pertinent as well. options trading is not a large proportion of my overall portfolio these days, partly because of exactly what he's saying in that topic, and partly because my capital base is now well above the SIPC coverage we used to get under IB LLC. i've always made sure my IB account didn't creep above that level due to paranoia over the nominee account model. i mainly trade options for the challenge and to keep trying to improve (and there is very much a lot of room for improvement on my side), i don't really rely on it for income - the vast majority of my capital is in international index ETFs, and CSL.

InsvestoBoy said:

@Seeking Truth I was looking around yesterday at some stuff and stumbled back across one of the funds that does this CC stuff.

Djerriwah Investments, part of the Australian Foundation Investments family I think, along with AFI and Mirrabooka (small caps).

This is their performance vs benchmark going back 15 years

View attachment 102590

They use an active approach to determine how much optionality to sell, etc with a max cap of 50% coverage...and the result still seems to suck just about as much as a naive approach.

If these guys can't do it well, why does anyone think they can do it better?

Curious to hear any thoughts from @cutz or @Sharkman are you guys out there outperforming this fund?

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This fund can easily be outperformed by using a more quantitative, rather than mechanical approach.

But, it is no magic bullet. The outperformance is vs buy and hold ( not certainty of profit, and certainly not spuiker mendacity) and after tax considerations *may mean underperformance.

Tax is the neglected factor.

wayneL said:

This fund can easily be outperformed by using a more quantitative, rather than mechanical approach.

But, it is no magic bullet. The outperformance is vs buy and hold ( not certainty of profit, and certainly not spuiker mendacity) and after tax considerations *may mean underperformance.

Tax is the neglected factor.

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If it's easily, how come this fund doesn't do that?

InsvestoBoy said:

If it's easily, how come this fund doesn't do that?

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"Easy" was a poor word choice.

An individual trader however can be more nimble than a fund and use the Greeks more effectively, if educated enough. This is where outperformance can be achieved.

But if educated enough, a trader would probably not take a singular, CC approach anyway, FWIW

InsvestoBoy said:

Curious to hear any thoughts from @cutz or @Sharkman are you guys out there outperforming this fund?

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Hey Buddy.

I'm not sure if I can answer that !!

Stocks and CC's are not the only thing I do, if you include pulling out of stocks to do stuff like buying properties / renos / education / toys with engines and challenges life throws at you I've probably faired better than that fund you posted.

The options side of things took me years to get right, CC's then short naked index calls on and off with my blinkers on during the GFC years, did well, paid big taxes, thought it was great and later stocks that went on to outperform were called away with no amount of costly rolls able to save the positions, also got smashed on the Eurex along the way and quickly learned what it meant to be way to short on the gamma.

Over the past several years no home runs but I've been presenting my accountant option trading gains which I'm happy with. Mainly index positions long and short, not all winners, calls against my long terms, some ratios some not, bullish positions on stocks I will eventually like to add to my portfolio, example, one recent started as a ITM bull put $3 between the legs, morphed it into an iron fly with twice the calls and $2 between the legs into the rally, also a few **** ups which I've been massaging down.

Anyhows InsvestoBoy, I'm not sure what you're after, can't give you return on equity, I can't give you a fund comparison, I won't even bother to try and measure it, I adjust to conditions, winging it, unlike TA mechanical trading, one of those stocks that got called away years ago, a large chunk of my portfolio ended up being a 10 bagger so even though I didn't lose money, missed future profits probably outweighed option gains till recently, haven't analysed it, I moved on and put it down to learnings.

Regards.

in addition to nimbleness the other thing that needs to be taken into account is the effect of having skin in the game. i haven't read thru the details of this fund so i don't know whether it features incentive based compensation or outperformance based fees or stuff like that, but if it's like a typical fund they just collect the fee regardless of what happens. whereas a retail trader is going to have a way higher care factor given it's their own moolah at stake.

i remember catching up with an old mate one day a few years ago, who used to do some research work for a fund (can't remember which one now). naturally i was interested in hearing his thoughts on how he was managing his own investments, and was a little shocked when he replied "i don't have any, i just have the house". "but don't you work with this stuff every day, you must know this stuff pretty well?" "yeah, but that's not my money, what do i care!"

Having traded options for years now, I struggle to find a community of options traders, especially in Australia.
I'm going to go out on a limb here and say most people are not profitable (or unable to beat the index). Early in the piece I did trading courses and kept in touch via chat site/social media with several others. Most people stopped and weren't doing well or weren't happy with the results and a lot made losses.

My theory on this now is that it's like being back at school, all of us had the same teacher, same education, same books, same tuition, same amount of time, yet in a class of 30 there was mixed results.

I do follow options traders in the USA and they have been by far profitable. While some years they didn't beat the S&P500, I did note they were consistent year after year and they had some form of protection should the market decline. The best example I saw recently was a seasoned covered call writer in March lost only 5% although the market declined over 25%.

A former wall street trader provided a supposition that if all you wanted to do was beat the Index, then write covered calls deep out of the money against the index earning no more than 1% premium per month against the index, ie SPY, $SPX. This was insightful, however, you'd have been hard-pressed doing that from October through to mid-Feb. 6 to 10% p.a. above the index, in my opinion, is a nice return, yet most would laugh at that.

zac said:

Having traded options for years now, I struggle to find a community of options traders, especially in Australia.
I'm going to go out on a limb here and say most people are not profitable (or unable to beat the index). Early in the piece I did trading courses and kept in touch via chat site/social media with several others. Most people stopped and weren't doing well or weren't happy with the results and a lot made losses.

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Year in year out, what is the US index return for options traders to meet or beat?

@Seeking Truth

If the long term plan is covered calls, then accumulating optionable stock on current prices are very well priced particularly if you look back later on towards this date.

Depending on your appetite, risk management and your margin capabilities, you can get into a stock position by selling naked puts collecting some premium and if you get assigned, you own the stock you wanted. Of course you need to calculate the size of your assignment, and of course after fees whether the premium is worth it.