Writing Covered Calls

[mazzatelli]

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

 

[BrightGreenGlow]

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.

 

[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.

 

[BrightGreenGlow]

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

 

[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.

 

[mazzatelli]

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

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

 

[wayneL]

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.

 

[BrightGreenGlow]

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.

 

[BrightGreenGlow]

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?

 

[mazzatelli]

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?

 

[Ardyne]

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

 

[ParleVouFrancois]

Less than they would have otherwise?

That's how covered calls work.

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

 

[barney]

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?

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.

 

[wayneL]

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.

 

[BradK]

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.

 

[Logique]

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.

 

[barney]

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.

 

[cutz]

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.

 

[BrightGreenGlow]

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.

 

[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.