Discussion in 'Options' started by BostonTrader339, Nov 3, 2009.

  1. so i want to open the discussion about a long term fixed income options strategy a very wealthy friend of mine who lives in silicon valley that uses stocks like citibank as a monthly income.

    basically, from how he explains it, he owns x amount of citibank, and write out of the money calls every month for the expiring premium on the assumption the stock will continue to creep up every month, thereby realising the long term capital gain, and at the same time securing a fixed payment every third week of the month to the tune of $25K.

    he does very well at this, it seems, although i have personally never tested his trading strategy for being a swing trader myself.

    and feel free, atticus, to cut into this with your insults. i'm sure this thread will go off the rails at some point with stupid insults rather than sticking to the subject at hand.

    so at $4, am i writing the nov4C, the nov4P, or the 5s?

    am i vertically spreading, or just selling the one or the other?

    am i having to repurchase the shares every month at expiration for writing, or simply keeping the premium as my paycheck and any gain in the stock is inherent to the long term position in my margin?

    consequently, my long term outlook for citibank is nothing but up, i see little or no downside for years into the future, and i see this a $20 stock by next year.

    so every month, i'm selling options for income, reinvesting the profit against margin to increase my holdings on a dollar cost averaging basis, while limiting my downside almost absolutely.

    let the games begin...
  2. MTE


    The strategy is called a covered call and it works as long the stock doesn't tank. Try writing a call on Citigroup when it was at 60 and see it tank to 1. I bet you won't be that excited about that tiny premium your received for selling a call when you lose 59 on the stock.
  3. Devin Brady

    Devin Brady ET Sponsor

    Covered calls on dividend paying stocks "IMO" work best in a stagnant market, unless you are trying to time the market. The problem is you would receive less for the option because of lower volatility.
  4. okay, so let me throw this out as well.

    if 85%+ of all options contracts expire worthless, then the only logical way to use options is to capitalise on the extrinsic value.

    when is the ideal time to sell a covered call?

    and how many months out if most every option beyond the current month is all extrinsic?
  5. C is 3.90 right now, so your example is pretty much irrelevant.

    you could profit inversely from the drop with a covered put strategy.
  6. wayneL


    This is a fallacy. 85% of options do not expire worthless.

    Have a look here for the true figures http://sigmaoptions.blogspot.com/2009/07/90-of-options-expire-worthless.html

  7. 85% of options do not expire worthless.

    This is just an improper use of statistics. The truth is that a large number - perhaps 85% - opt options THAT ARE STILL OUTSTANDING WHEN EXPIRATION ARRIVES expire worthless.

    The options that have been closed for profits and losses are ignored by this statistic, making it 100% worthless.

    If you are bullish, you should not write ATM calls. There is too much chance the calls will be exercised or that you will repurchase at a loss.

    If you choose this strategy, you must accept the lower premium that comes with writing covered calls that are OTM.

    You may sell ATM puts, but your upside gain will be disappointing when the stock rallies because this position is equivalent to writing the ATM covered call.


  8. writing calls caps the upside while realizing the full downside potential. in the long run, from a statistical point of view, this strategy under performs buy and hold the underlying.

    there is no ideal time to sell a covered call, obviously, unless, of course your goal is to contribute to the market maker PnL.

    there is no tweak, customization or mysticism that turn the above facts around.
  9. wayneL



    But.... but... I can make 4-5% per month according to the gurus!

    They wouldn't lie... would they?

    :p :p
  10. but you can. by simply selling an OTM with only extrinsic value, you're locking in x% return per share every month, with no downside risk on the stock.

    i've calculated it out the returns can be massive, and consistent, and compounding.

    my point in bringing this up was to solicit other opinions, intelligent ones, so i could learn.

    if possible, i'd like to keep the hyperbole to a minimum.

    #10     Nov 3, 2009