Writing Covered Calls

[mazzatelli]

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

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.

 

[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

 

[mazzatelli]

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.

 

[wayneL]

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

 

[village idiot]

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.

 

[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

 

[wealthstudent]

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

 

[wayneL]

I give up.

 

[mazzatelli]

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.

​

 

[builder2818]

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.

 

[BradK]

I give up.

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

Cheers
Brad

 

[brty]

I give up.

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

brty

 

[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

 

[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.

 

[Ruby]

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)

 

[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.

 

[malachii]

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

malachii

 

[mazzatelli]

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? :

 

[BradK]

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

 

[wayneL]

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!!