Writing covered calls over long CFD positions

[jaystar86]

An interesting view point.

My question was more rhetorical in nature then literal. however, I did glean some useful thoughts from your reply.

And, thanks for the welcome. I find this site a fantastic resource of knowledge, experience and tips.

 

[Robshan]

I thought I had given you quite enough information already and I do have other things going on beside sitting here typing. Information gleaned from years of experience in trading options as a retail trader and lots of knocks along the way.

... snip ....

I think I have summarised the pitfalls of the strategy in question pretty well and feel I have no more to add. I have also suggested you look at the synthetic version of this strategy which is constructed with puts and saves a considerable amount in slippage and brokerage.

If the risk of the put strategy isn't for you, then the risk of the cfd (or shares) + itm calls has the same risk (well almost give or take a bit on interest).

It's not out of spite to refuse to discuss it further, however, I feel I have generously shared the best of my knowledge already with you. There are others around here whom I consider more advanced in options knowledge than myself, and am content they would quickly correct if they feel I am wrong...lol

I am happy to discuss options trading in general, but personally feel this strategy has no merit UNLESS one already owns long term shares and wants to sell well OTM calls over those shares to increase the returns a little.

Cheers

Thanks Sails, I do appreciate the information.

 

[sails]

Thanks Sails, I do appreciate the information.

No worries, all is good...



And as a side note - what happened to Mazza? I saw he had replied to the thread but it disappeared? Tried to send him a PM to find out what happened but can't do so?

 

[mazzatelli]

Just in case sails, WayneL, cutz, village idiot and Slouch didn't make it abundantly clear:

covered call = short put
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In my attempt to baffle and ward of evil spirits, the following is another interpretation of the trade that makes it disadvantageous (sails has already discussed this). Being in this position means you are:

selling upward curvature

The plot is not perfect, but assume the stock price is currently $100, with peak of gamma distribution at $100.​

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Now if you sell a put out-of-money - let's take the extreme $50 as per the graph, the gamma is much lower.

Nearly all posters, who ask about covered call and its variants, nonchalantly dismiss the risk of a drop in share price. They seem to think in dollar terms, the drop has a similar effect on the option.

Observe the graph: if the stock drops to $50, the gamma, increases by moving up the slope [indicated by red] to the peak, since it is now the new at-the-money strike. This is what I mean by selling upward curvature.

So not only is the option value increasing, but it is doing it at an accelerating rate, all of which as an option seller, you don't want unless heartburn is the desired effect.

It's been established there is implicit leverage in the option itself, as indicated by this curvature. Throw on the fact that you can further leverage this position, margin wise, using options + cfd's (I'm assuming no change to portfolio allocation).

...and well the effect gets compounded when you lose...

Now unless you are confident you have an edge to overcome this e.g. statistical analysis, other than "we can't lose because there is a guaranteed stop loss", then it is best to steer clear

 

[mazzatelli]

Amusing how detailed explanations why this is shyte and/or mention of Greeks causes crickets to start chirping.

Then another thread pops up along the lines:
"Hey about these covered calls, they're quite good......."

Thank goodness the brokerage and slippage is poor in Aus, otherwise credit spread/iron condor seminars would be running riot!!!

 

[jaystar86]

Asking here because I couldn't be bothered posting another thread and I believe the people frequenting this one can answer it.

Despite everything written here CC's still seem a reasonable strategy to me. However, I my eyes have certainly been opened to the nature of selling puts.

So I ask, (without taking into account market dynamics). Is writting puts up till the point of being exercised and then turning around and writing calls on the same share a valid concept? Or is there a few steps/considerations I may be missing?

(conscious incompetence here)

Regards,

J

 

[mazzatelli]

Despite everything written here CC's still seem a reasonable strategy to me. However, I my eyes have certainly been opened to the nature of selling puts.

Well nice to see you have picked up on WayneL...can't go wrong there

I am not having a go at you personally, but as said before, barely any new posters get the message about what I have bolded in your quote. In fact every covered call thread has someone saying this, and another ignoring it.

CC's = selling puts

If you write puts first - you are selling puts naturally
If you then get exercised and sell calls on that stock - you are selling puts synthetically

Bottom line though: You are SELLING PUTS!!!


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[rapphire]

Sounds like an extremely silly strategy,

I’m not sure how CFD’s work with regards to cross margining but you certainly can’t lodge them as collateral with the OCH so there’s your first problem; you’re going to have to come up with cash margin.

What’s the point of writing a deep in the money call where extrinsic is SFA.

What’s the point of mucking around with 2 lots of bid/asks and brokerage where you can short a put for the same payoff.

What does OCH and SFA stand for?

Cheers

 

[rapphire]

I actually just took the time to read your example. One strike in the money (i.e. the 100) is not a "deep" in the money strike IMO... not if you're getting $7.50 for it (indicating fairly lively volatility).

You would get stopped out many more times than you think you might.

And Slouch is bang on as well. Extrinsic will de-ball you pre-expiry unless very close to expiry.

If get stopped out on the CFD/stock, it is compensated by the profit in the call that we sold, no?

 

[rapphire]

You may have been told that you can put a stop loss on the CFDs - you can also put a stop loss on your put option.

I think the key is with a CFD the broker, IG markets for example can provide guaranteed stop loss whereas on most derivatives exchange like CBOE/CBOT there is just no guaranteed stop loss.

 

[skyQuake]

I think the key is with a CFD the broker, IG markets for example can provide guaranteed stop loss whereas on most derivatives exchange like CBOE/CBOT there is just no guaranteed stop loss.

They don't offer GSLOs on oppies. GSLOs on stocks can be hit and miss too. eg pre-reporting no GSLOs allowed. In the runup to reporting the GSLOs must be 20% away or something
Also you pay handsomely for the privilege (0.3% to 3%) depending on the volatility of the stock

 

[rapphire]

They don't offer GSLOs on oppies. GSLOs on stocks can be hit and miss too. eg pre-reporting no GSLOs allowed. In the runup to reporting the GSLOs must be 20% away or something
Also you pay handsomely for the privilege (0.3% to 3%) depending on the volatility of the stock

Thanks Skyquake.

I was attracted by the GSLO at first, because with a GSLO we can defined our initial risk clearly. Without GSLO, who knows how low a stock can gap down.

But as i look into the practical issue..hmmmm. For example, because the GSLO must be at least 5% away from spot, so we can only use ITM call (OTM call does not have the extrinsic value big enough to cover the 5% loss if the stock gap down). So we select a ITM call with around 95% moneyness , but then at these moneyness, the extrinsic value is just so thin if we sell the call at bid price, and the liquidity is awful. To workaround, one can use limit order to write the call at a higher price, but there is no free lunch because the spot would have gone up too if the call price did move higher to fill your limit price.

What are your thoughts?

Cheers folks.

 

[skyQuake]

There is also the issue of just random movements in the stock triggering the GSL, but still having the options leg still in there.

 

[rapphire]

There is also the issue of just random movements in the stock triggering the GSL, but still having the options leg still in there.

Thanks Skyquake.

Once GSL triggered, can't we buy back the call? Or is the concern about the liquidity hence slippage when buy back the call?

 

[skyQuake]

Thanks Skyquake.

Once GSL triggered, can't we buy back the call? Or is the concern about the liquidity hence slippage when buy back the call?

You can. But even assuming you get a fill at midpoint with good liq, (big if) The loss on the CFD leg will be greater than the gain on the oppie leg (because you were unable to hold it to expiry)

And if the market spikes thru your stop then starts reversing, you could end up paying more than what you sold the initial call for (plus the CFD loss)

Its a good strat in a low volatility rising market but once you get some volatility or some bad luck, it can really ruin everything

 

[rapphire]

You can. But even assuming you get a fill at midpoint with good liq, (big if) The loss on the CFD leg will be greater than the gain on the oppie leg (because you were unable to hold it to expiry)

And if the market spikes thru your stop then starts reversing, you could end up paying more than what you sold the initial call for (plus the CFD loss)

Its a good strat in a low volatility rising market but once you get some volatility or some bad luck, it can really ruin everything

Thanks Skyquote. Finally i understand. I made the mistake of thinking about at expiry only.

Appreciate your explanation. Have a good night mate.

 

[hhse]

Yes strategy is possible.

People who use this are seeking to exploit leverage provided by CFDs. However, there are alternatives. i.e buy longer dated ITM call & sell OTM call.