First off I want to thank you all for your opinions and replies. But through part of my course I was taught how to manage the Risk. 1.# You check your stock every day, and IF the stock goes down, You buy back your option then sell the stock. You manage how much you gain and loose. 2#. You find stocks that have a good track record of staying the same, Not going up, and not going down that have a high Option premium. So I don't understand how you guys are saying covered calls are unlimited Risk. You buy the stock, You own it. You write Options with a high strike price that is very unlikely that it will reach it. (Research your stocks) If the stock drops more then you want it to, Buy back the Option and sell the stock. Replies on this opinion would be appreciated. Thanks =)
I think I see why covered calls look so attractive to you. Someone, somewhere told you that you could eat your cake and still have it. This is fine, but it's very w**k-intensive, and every time your stock goes down you will have to decide whether you think it's coming back up or not. A portfolio that forces you to watch it every day isn't going to let you sleep very well at night. And in reality, most of the time your stock moves against you, you'll end up not doing anything at all. That's human nature. Thing is, "stocks that have a good track record of staying the same" are pretty much by definition stocks with a low option premium. Options are priced to volatility, both historic and expected. If you see a stock that's gone nowhere for two quarters and has big option premiums, you can bet there's a major FDA approval, court decision or somesuch coming. Your risk from covered writing isn't really "unlimited", but it's not any lower than owning the shares free and clear. Your maximum loss is when the stock goes to zero, and that's way more than your call premium. Writing calls doesn't reduce your risk, it simply puts a little extra cash in your pocket and reduces your reward. The farther out of the money you write, the smaller your option premium. If it's "very unlikely" the stock will get there, you won't get anywhere near 5% a month. Especially on stocks with a track record of not doing anything. Look at GE's 45 dollar calls. October is worth a dime, December 43 cents. All the research in the world wouldn't have protected you from what happened in August. I was naked puts on MO. Then, subprime crisis. Panic. Does MO have anything to do with banking or interest rates? No. Do they have huge piles of cash? Yes. Will they be affected by access to credit? No. Do they sell to banks? No. Did the stock drop like a skirt on prom night? Hells, yeah. All the research in the world also wouldn't have protected you from what happened on September 11, 2001 and following. Well, maybe the Pentagon's research could have protected you, but that's another story. There are always risks you can't foresee, no matter how you invest. Research is an excellent idea, but it won't keep you completely safe. If you're going to be doing that frequently, you will save a lot of commissions trading naked puts instead.
Ok then tell me about the Risk vs Profit of naked puts, And point me into a direction for me to learn about them. I will be getting 10,000 dollars within the next 6 months to trade with. I am looking for limited risk <> Limited reward, I want to be conservative and multiply my money. Point me in the right direction.! =) I thought covered calls would be doing that for the fact that I could yield 5%+ interest and always buy back my option and sell the stock if needed to be. So if I get some Option premiums of 18% others at 2% others at 10% and one stock drops, buy back the option sell the stock. And hope that the diversity of stocks I invested in Cover-Calls will averge 5%+. But if this doesn't work then I want to know a way that works to grow my money. Point me in the right direction. But remember I am seeking limited Risk Limited Reward. Or Limited risk vs Unlimited Reward. Thanks!
That's easy. The same as covered calls. See above. Learn about covered calls. I don't mean to offend you, honestly, but 10k isn't nearly enough to have a diversified portfolio of anything. I certainly don't recommend trading options heavily. If you're lucky you'll manage to own 100 shares each of two $50 stocks, or 100 shares each of three $35 stocks. You can write calls on them if you like, but that won't make you any more diversified. You'd better choose your three stocks very wisely. You could instead invest in an index spider or ETF, but you'll find those have even lower option premiums than common shares. You want to be conservative and make lots of money? Not going to happen. Those are conflicting objectives. If you want to make money, you'll have to decide whether you're better at picking stocks that go up, stocks that go down, or stocks that stay put. Then, pick one and we can talk specifics. Where did you get these numbers? It's true that covered calls are limited-reward and make it reasonably likely that you will make money on a position. And if your shares are fully paid, the most you can lose is all you have. But any stock that gives you 10% premiums in the front month will give you one or two months of good writes at most. Then it will move out of your "sweet spot" (up, hopefully) and you will need to find something else to invest in. As an example, I'm thrilled to get over a dollar a month writing at the money puts on a $70 stock. That's a percent and a half. I do it because I think the stock will behave itself, not because the numbers are huge.
============================================== You want to be conservative and make lots of money? Not going to happen. Those are conflicting objectives. If you want to make money, you'll have to decide whether you're better at picking stocks that go up, stocks that go down, or stocks that stay put. Then, pick one and we can talk specifics. ============================================== Ok lets take a look at all 3. Actually, Lets talk about stocks that are staying put. Not going anywhere. What are my options with that?
Straddles, or preferably flies; or long calendars if there is a expected jump in vol. What is the fascination with the short put?
I am looking for something in which I am in control of my risk that yields a decent but not oustanding % back. That is what fascinated me about covered calls. Being able to recompound the % back to reinvest it. With the paper work I did 10,000 dollars in 7 1/2 years or around there turns into 1 mil at 5% per month. I want to learn to get that % of yield back with something that I am in control of how much I loose. Thats my fascination with Cover Calls and Puts.
And another thing, I paper traded cover calls for 2 months. Each month I yielded a 8% then 10% averaging 9% for the 2 months together. That was with a Virtual 100,000 dollars. Was that luck or not........? the guy that taught me this also did it on paper trading he yielded a 12%. Now your probably asking why he isn't doing this, He will be but he is paying off his debt first to invest with money that he has. That is his 1# rule that he ingrained into my head. NEVER invest with money you don't have.! =)
Lets cut the the numbers then. You are expecting to make $500 a month (5%) on covered calls with $10k. First off, how many stocks can you buy with $10k? 4 - 5 if they are under $25 a share and only 100 shares. For asset protection you will need stable strong companies that hopefully will not crash and burn. You also need to assume you will make 5% a month every month going forard. In August you would have probably lost on all 4 or 5 stocks and had to sell the stock and close out the call as you said you would do in a bad move down. You might take a 10% hit on the portfolio from $10k down to $9k. Now to make $500 min a month you need to make 5.5% just to get back to even. The point is losses are inevitable and you cannot just assume you will take $10k to $1mil. That is a nice goal to work towards but as a newbie to options, it is unrealistic. How about you do 2 monhts of paper trades on 4 stocks and sell calls and see how the portfolio does before committing the money. 2 months is not enough by any stretch but at least you can get a taste of it for free. Post your trades here so you can get some useful analysis.
Anyone earning 12% monthly in CC is leaving too much on the table. FWIW, I don't believe for a second that your friend is banking 144% non-compounded. Either you're selling something or you're simply naive. Back up your claims with examples. The October-cycle is upon us. Define a $10,000 portfolio of CC on this thread; at least 4 stocks in unrelated sectors.