Covered Call Insurance

Discussion in 'Options' started by dickey7, Dec 11, 2018.

  1. dickey7

    dickey7

    What is the best method to "insure" covered call position if market starts moving downward towards your strike price. So say I sell call a couple dollars in the money and my intention is to profit the time value only (extrinsic premium). But, if market starts moving downward towards strike price, how can I implement insurance? Other than just buying puts, as they eat away my profit margin and induce additional risk.
     
  2. tommcginnis

    tommcginnis

    You need to erase the board and start over.

    Covered calls and buy-writes are 'low risk' trades only when you already own or intend to own the underlying. Otherwise, they carry the same risk as outright ownership, which you should hedge/insure as befits your entire portfolio.

    Look at some option profit/loss diagrams, and work out, dollar-by-dollar, what happens. (And, prove to yourself that 'buying puts' does *not* 'induce additional risk.')
     
    Last edited: Dec 11, 2018
  3. dickey7

    dickey7

    My intentions are low risk. I am only interesting scalping the premium, and letting the stock get called away. It is a stock that I don't mind owning outright. I don't mind if the price blows up, as I still get the premium. The risk is if the stock bottoms out, as you mention, similar to being long the stock alone.

    Buying puts, takes away profit from the premium received above...and then if stock moves upward, it can turn into a losing position overall.
     
    tommcginnis likes this.
  4. tommcginnis

    tommcginnis

    Consider, rather than buying a put outright, a spread.
    For giggle's sake, your CC's bottom-side BE, and then sell a few strikes below, to make a dent in the higher/long put cost. (Here's where I put that chin-scratching emogi.....)
     
    Last edited: Dec 11, 2018
  5. dickey7

    dickey7

    Hmm.... so a put credit spread. I'll have to ponder (and scratch) around on this... Not delved in spreads much, that was where I was thinking this thread would go. Thank you, any further info/detail is appreciated.
     
  6. JSOP

    JSOP

    If you want insurance for the stock, you shouldn't write the call; you should've just bought the put; that's the insurance. Writing of the call is NOT the insurance for your stock. I always see it as reducing my transaction cost with the downside risk potential.
     
    PennySnatch likes this.
  7. dickey7

    dickey7

    I'm looking for a way to "lock in" the covered call premium.... Not necessarily insurance on the stock position. Trying to find a way to insure (for less than premium received on call), therefore locking in a small gain.
     
  8. You seem to be looking for a risk free income on CC. Not going to happen.
     
  9. drm7

    drm7

    What are you asking for is arbitrage, and, for practical purposes, it doesn't exist. Google "put call parity." A perfectly hedged option position (with any combination of puts, calls and the underlying stock) will theoretically return the risk-free rate before transaction costs (which aren't trivial).
     
  10. drm7

    drm7

    One small caveat to my previous Debby Downer response - if you are certain that your stock will outperform its index (i.e. Russell 2000, S&P 500, etc.) then you can short and ETF of the index or buy puts in the index, and you will clear the premium in the covered call, plus any outperformance vs. the index.
     
    #10     Dec 12, 2018