Covered call calc

traderjo · Feb 20, 2020

ironchef said:
Been there done that with GOOGL, AAPL...

There are two ways to look at covered calls:

1. You are a pro, you trade it as a pair, first you look for stocks that fit your criteria then writing covered calls. You execute those as a pair trade. If the stocks get called away, you make max profit and are happy, move on to the next trade.

2. You are a newbie like me, who think covered calls are a way to generate income out of stocks that don't pay dividends or you want to further juice your dividend payout, you write covered calls on the long term buy-&-hold, like GOOGL, AAPL, BRK.B. They get called away and you end up buying them back at a much higher price and have to pay capital gain taxes on top. You essentially sell naked calls.

As a newbie, after a few months, I realized the mistake of #2 so I said, OK I was not going to buy my GOOGL, BRK.B back, I moved on and used the proceeds to buy GE... covered calls. Lo and behold, GE went down and my calls expired worthless but now I own GE instead of GOOGL, BRK.B. I said OK I just kept writing covered calls on GE... After a couple of years, GE went from ~$30 to ~$6. I ended up holding the bag on GE. Yes, I made some premiums but the net result was much worse than just buy-and-hold GOOGL, BRK.B...

If you newbies want to write covered calls, do #1 and don't follow my example.
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GE went from ~$30 to ~$6. I ended up holding the bag on GE. same here
By the way when you say DO 1) It still has the big downside risk

ironchef · Feb 20, 2020

traderjo said:
GE went from ~$30 to ~$6. I ended up holding the bag on GE. same here
By the way when you say DO 1) It still has the big downside risk
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I feel for you.

You are right, if you do # 1, there will be winers and losers, like any trading/betting. The most important advice I can give a fellow newbie is don't write covered calls blindly, in the long run you still need a correct opinion of the underlying to make money. The analogy here is playing blackjack. If you are like an amateur blackjack player, you will end up losing because the expectancy is negative. But if you are a professional card counter, you have an edge.

Let me say it again, trading covered call is not an edge, trading covered call with a correct opinion of the underlying (including volatility and direction...) is an edge. Some will say there is a risk premium you can harvest. If you check CBOE and the BuyWrite index, you will find the edge very small (absolute return slightly worse than buy and hold but risk adjusted return better) and by the time you factored in commissions and bid/ask, us amateurs are better off buy and hold the index. You will do better and have more time to spend with your family.

You reminded me of me back in 2013. Good luck and best wishes.

lightninboy · Feb 21, 2020

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Covered call calc

traderjo

ironchef

lightninboy