Covered CAll Interest

Discussion in 'Options' started by CoveredCalls5, Sep 19, 2007.

  1. I am new to Covered Calls, Teaching myself all I can and learning from a friend of mine. What I have learned so far is the most basic and fundamental ways of earning a nice premium from doing a covered call. But after reading through some of these threads some of you are saying people who write Calls on covered calls are suckers?

    I don't understand this, If I have 10,000 dollars and I diversify this into 5 different stocks that all have a premium of 3%-18%, That has a steady track on the charts, Whether it is going slightly up or down, Then I am earning an Average of usually 5%-10% on this 10,000 dollars.

    Doing the math, If you start with 10,000$ You can turn that into 1 million within 7 years of holding it at 5% interest a month. And its definately possible to hold it at 10% average for the year per month.

    If a Stock starts to go lower then your comfortable with it going, (Because you should be checking them every day) You just buy back your calls and cancel out the transaction. Easy as that. Just don't know why you guys think that people writing covered calls are suckers when they are yielding such a high % back in return, that recompounds and over time turns into alot of Money. But once again I am new and I am seeking to learn. Please give me your Opinion Thank you.
  2. MTE


    Do everyone a favour, bring up an SPX chart or some other one for that matter and see what it did between 16th of July and 16th of August, 2007, and then tell me how did covered call guys do!? Especially on 7/26, 8/9, 8/14 and 8/15. Also, take a look at 2/27 of this year...

    A covered call has a limited reward and an unlimited risk (well, technically, it's limited to the stock falling to zero).

    By the way, if you feel so strong about the covered calls, then tell me how you feel about selling naked puts?

    P.S. 10K at 5% per month for 7 years is 602,422.41 and not 1mil! There's no way you can average 10% per month (213% per year) year in year out!
  3. Consider suicide as a viable life choice. Dial 800-JUMP-OFF
  4. That's the trick. Sustaining a covered call (or naked put) portfolio more or less depends on the stock trading in a relatively narrow range. If it goes up too high, you still get your profit but you lose your shares and need to either chase the stock higher (for added risk) or research another stock to replace it. If it goes down too low, you won't be able to continue writing unless you move to lower strikes, which could mean getting called away at a loss.

    In the end, a dedicated covered call writer will become a "garbage collector". The good stocks get called away sooner or later, and the bad stocks languish in your account unable to draw a decent front-month premium at a respectable strike.

    Every (retail) option position is a directional play. Even if that direction is sideways, you're still betting the stock will trade sideways and not significantly up or down. My general advice for option writing (call or put, naked or covered) is that you should aim for the option to expire right at the money.

    The moral of the story, I suppose, is that you shouldn't be a "covered call writer". You should write covered calls when you think that's the appropriate strategy for a particular stock.

    Hint: You should feel pretty much the same.
  5. If you simply put down the assumption that stocks never go down and believe it then CCs can earn nice returns a month. But of course you just have to believe stocks never ever drop in price. If you truly feel stocks never go down then CCs make no sense as you are just capping returns.

    And 5 - 10% a month on CCs? I tihnk you woul dhave to find some very volatile stocks with high premiums to get that each and every month.

    I would not say CCs are for suckers but those who get into CCs always make the fatal two assumptions:

    1. stocks never go down
    2. high monthly returns are doable and easy

    This to me is where the sucker part comes in because they are simply making wrong assumptyions about the market.

    Can someone make decent returns using CCs? Sure but you really need to focus on stock selection, risk management and having long-term goals.
  6. A 50% NC rate of return for >3 years has never been achieved by a CC/short put fund.
  7. Daal


    Selling naked puts can be a excelent strategy, reread okumus interview on stock market wizards
  8. See, this is the problem I was talking about. People always focus on the strategy, and not the stock.

    Almost every equity mutual fund out there is a "buy stocks" fund. Some of them do well. But they don't do well because "buy stocks" is a good investment strategy. They do well because they buy the right stocks.

    The same thing applies to covered calls/naked puts. You won't make money because "writing covered calls is a good idea". You will make money if covered calls are the right thing to do with the particular stocks in which you invest.

    Here is the key to successful option investing:

    1) Choose a stock.
    2) Determine your outlook for the stock.
    3) Choose an option strategy that is appropriate for your outlook.
    4) ???
    5) Profit!

    If your step 1 is "choose an option strategy", you are setting yourself up for nasty surprises.
  9. Problem for me is that CC is a limited reward, HUGE risk strategy. If you are moderately bullish then there are better ways to play a sideways move or somewhat bullish move higher with ITM Calls, Bull Call Spreads, Bull Put Spreads, Diagonals, even calendars.

    If you do not have a stock portfolio, i think the buy-write is not a good strategy to undertake. If you already have a portfolio of stocks then adding CCs is not a bad idea to add some income if you are not married to the stocks. Otherwise short puts might be better use of margin and portfolio if you were deadset on doing it.
  10. That's a problem for me too. The key is finding a solid underlying issue and choosing your strike price wisely. Still, I write naked puts and I had some pretty serious drawdowns in August. Got the margin violation warnings to prove it.

    When reward is limited and risk is large, the only way you can profit in the long run is making sure you win most of the time, and you cut your losses wherever possible.

    I've explained this some time ago on the other board, but it bears repeating here. I believe covered calls are better than naked puts for the novice investor.

    Yes, the two positions are mathematically equivalent. Yes, naked puts save you exercise/assignment/rolling commissions. However, covered calls have a number of psychological/convenience advantages that the inexperienced should not overlook. Many of these are related.

    1) Brokers are more likely to give you permissions for covered calls than naked puts. Probably because most people cover calls with fully-paid shares but cover puts with minimum margin.

    2) You are less likely to over-extend yourself with covered calls, because you feel like you should pay for the shares. With puts, you tend to write till your margin runs out, and then you might get saddled with more shares than you could afford to own. I remember frantically closing a spread position one Friday that would have assigned me something like a million dollars worth of stock I couldn't dream of paying for.

    3) Covered calls are easier to visualize. You own some stock, and you make money with it up to a certain point. Past that point, your stock goes away. Very intuitive. Naked puts give you a double negative sign, and it's hard to wrap your head around that at first.

    4) Owning the shares makes you focus more on the behaviour of the underlying and less on the option as an independent, abstract investment. Focus on the underlying is key, because that's what will ultimately determine whether you make money on the option.

    That's just off the top of my head. I may have had other reasons too. What it comes down to is this: never trade what you do not understand.
    #10     Sep 19, 2007