Written Call Defensive Strategies

[bucket183]

I am relatively new to the options trading game and have been reading as much as I can on the subject. My basic strategy is the Buy/Write and was wondering about defensive strategies.

Rolling Up/Over - happy with this technique, simply buying back the original contract and then selling a new one (either for the current month or the next) From my experience it is better to buy back the contract before midday of the expiry date (in case the underlying comes back down). Does anyone have any other suggestion?? (Obvious depends upon the trend at the time)

Bull Call Spread - now the book that I am reading states "remove the obligation of the XXX written call we could simply purchase a YYY call" So I have sold a call at X the share price has gone above this so I purchase a call at a lower exercise price (ie so I can exercise). Is this how this strategy works ie I will get exercised on my call so I buy a call and exercise that. I don't get why I would do this rather than rolling up. This strategy will be more expensive although I will be adding an unrealised gain. Or am I missing something that the ASX/ACH just do something with the contracts (ie cancel them) or do I have to go through the whole process of selling the share and exercising and buying shares???

Call Ratio Backspread - The underlying has gone above the strike price, so I buy 2 calls closer to the underlying but still in the money. Why 2 contracts? And once again I am going to exercise these contracts or does something else happen?? If I exercise I end up with twice as many shares than before, why does that help me??

For all the numbers that I ran (based on having to exercise and buy and sell shares (brokeage)) the cheapest option seemed the roll up.

This is all based upon wanting to keep the shares.

 

[cutz]

Hi,

One of the things i do for the long term stocks is i may short 0.75 the face value i own just OTM then buy some longs further OTM at a higher ratio, this way i haven't capped my upside.

If the wings are too expensive because IV is pumped up I may go 1 for 1 on the contracts or buy no wings at all and short calls at 0.5 face value of what i own and then do a roll in the same month if i have to.

Once or twice i've been backed into a wall with no wings because in a strong rally rolling into the next month doesn't help much, you still need to go into the money to do it for credit, you then may find yourself selling a call with not much extrinsic value which sort of defeats the purpose of what you set out.

Just some idea's, nothing works 100% of the time.

 

[bucket183]

Hold on Cutz, can you say all again and dumb it down a lot. Perhaps an example??

 

[cutz]

Hi bucket183,

What i've said is already dumbed down.

One example, you own 4000 QBE, you've had them for a while.

Short 3 Nov 23 calls and buy 6 Nov 25 calls, take in $1500 in credit and you haven't capped your upside.

Obviously there's many variations of this.

EDIT >>> Actually bucket183 I just noticed your basic strategy is buy write, ignore what i just said because I'm only referring to covered call writing on long term holdings.

Personally i prefer put backspreading over buy/write.

 

[wayneL]

Hi Bucket,

A couple of questions.

1/ It's not an official distinction, but around here we tend to distinguish between buy/writes and covered calls in terms of philosophy.

Buy/Write = buy the stock and sell the call just to collect the premium and probably hope to be called .

Covered call = sell calls on stock you already own and probably don't want to be called the stock.

I stress it's not an official distinction, just one we use around here to distinguish between the two philosophies.

If you let us know what you are trying to achieve, we can answer the question better.

2/ What is the book and who is the author?

As a general caution, many authors try to sound clever with convoluted strategies that can be achieved with more simple ones. For instance, (all things being equal) you are dead right about just closing out the ITM call to remove your obligation to sell, and rolling up and/or out if you want to continue the strategy.

The backspread idea when already DITM doesn't make sense to me at all, but I would have to read the author to see his rationale.

 

[bucket183]

WayneL,
What is strategy?? My strategy is for income creation, so whether I buy/write or do covered calls depends upon which one will yield the highest. As I said I am new at this and last month was the first time I was in the position that my stock was ITM so I rolled up as the whole process of be exercised and buying other stock would have reduced my cashflow, plus I was happy with where the stock was going ie sideways.
I guess there are better strategies for income creation but this (covered calls and buy/write) one that I am comfortable with at the moment.

 

[wayneL]

WayneL,
What is strategy?? My strategy is for income creation, so whether I buy/write or do covered calls depends upon which one will yield the highest. As I said I am new at this and last month was the first time I was in the position that my stock was ITM so I rolled up as the whole process of be exercised and buying other stock would have reduced my cashflow, plus I was happy with where the stock was going ie sideways.
I guess there are better strategies for income creation but this (covered calls and buy/write) one that I am comfortable with at the moment.

That's fine. Sans further information, it would seem that simple rolling up/out makes the most sense for you.

**still wonders what the book is you are reading.

 

[mazzatelli]

**still wonders what the book is you are reading.

Shhoosh!!! Market secrets to wealth :

 

[cutz]

From my experience it is better to buy back the contract before midday of the expiry date (in case the underlying comes back down). Does anyone have any other suggestion?? (Obvious depends upon the trend at the time)

Nothing is safe on expiry day, just have at look at the beautiful action on the big Australian and the four pillars.

IMO holding short options to the end is a little dangerous, best to tidy things up beforehand.

 

[Grinder]

Agree with Cutz. Don't even like being there in expiration week, let alone expiration day. Just not worth it imo.

 

[cutz]

Nothing is safe on expiry day, just have at look at the beautiful action on the big Australian and the four pillars.

Um, actually.

Excuse my waffling on, i've been working on the impression that equity expiry was yesterday, it's actually next week.

Equity expiry isn't always the week after index expiry.

I guess it wasn't such a bad thing arriving one week early.