Covered call investor

Discussion in 'Trading' started by lojze, Dec 31, 2012.

  1. lojze

    lojze

    Anybody or everybody?

    If yes, how do you implement this?
     
  2. stoic

    stoic

    The first rule for a Covered Calls or a Buy-Write is you want to own the underlying stock. There are a number of ways to utilize the covered call. 1. Used as an exit strategy. Example: You buy the stock @ 50 with a sell target of say 55. One could sell the 55 strike calls right away or wait till the stock hits 55 and then sell. You receives the premium for some downside protection. In a way you get paid to sell the stock at your exit target. Some will say this is a poor strategy as you limit your profit with substantial downside risk, and that Selling puts is superior. I disagree, If the underlying move against you the short put will also need to be closed with potential loss. As for limiting ones profit, one can always roll up and out. That is to buy back the short call and sell another call with a higher strike and more time. The dissenters will say this only locks in a loss (on the short call) while continuing to hold the long stock for risk. Again I disagree. Of course the ones here on ET that bash buy-writes are geniuses always buy stocks that are just about to rally substantially and buying back the call that's now 15 points in the money would most likely not be beneficial. However, I've been doing quite well with buy-writes for over 30 years in about 20 stocks per year, I have to say that the number of times the stock moved way past my strike making me wish I didn't have the short call can be counted on one hand. Most of the time, if I feel the stock has more upside, I can buy back the short call for less than the new call, adding to my downside protection and participating in the upside move. But remember the first rule. You must feel comfortable in owning the stock. 2. Another good use for covered calls is to augment the dividend. There are lots of very boring stocks that move little and pay good dividends in the 3.5% to 4% range. One can sell covered calls way out of the money with the expectation that it will just expire worthless. My personal experience with this strategy has shown that one can increase the annual yield on a good dividend stock to anywhere from 9% to 12%.

    The strategy can be applied as very conservative or more aggressive, but as in everything in the market, each has a tradeoff. Let me know if you require more info. I'll be happy to provide answers with examples.
     
  3. stoic

    stoic

    Working in the biz at major brokerage as the margin rep and the ROP, I've seen a lot of accounts blow-up with naked puts.......I've never seen one blow-up with covered calls.
     
  4. That is due to leverage, not the strategy.

    If your goal is income and are putting on a new position from scratch, the naked put is a superior trade because you will net more $$ not only by the price fill of the put vs. the spread on the long equity/short call but also by saving fees on not making two trades, nor would you have to leg out of two positions to exit.

    Say you have $10K and are looking at a $20 stock. You would be able to buy 500 shares or the equivalent of which you can secure, sell 5 naked put contracts. You would have no more risk than in either scenario. But by selling the put, its more cost effective.

    The only time it would be logical to sell calls would be on an existing position.
     
  5. thats a complete sham.. there is such a big difference between a covered call and naked puts.. naked implies leverage .. meaning you don't have the cash to cover being put the security.. if your comparing these two strategies your a bit lost on whats really going on... your long equity risk with selling cash secured puts.. your short equity risk selling covered calls...

    a linear pnl extrapolation of covered call strategy out into the future will just bring you less then benchmark returns over time.. the downside distrobution is a better play cash secured...
     

  6. buying 1000 shares of SPY and selling 10 calls is the same as selling 10 puts naked.

    There is no difference other than some funding considerations (between your funding rate and libor) and some implied dividend issues (generally a non issue).

    Nor is there any implication to selling puts meaning more leverage vs buy writing. Leverage is an investors decision independent of the trade.
     
  7. There is no implication whatsoever.

    If I have $10K cash and my goal is to derive income from this amount of money and I am looking at buying 500 shares of a $20 stock to sell calls against vs. selling 5 naked puts and staying in a cash secured position, its the same thing.

    Just because you sell a naked put has nothing to do with leverage or what your equity/cash account disposition is. Some folks obviously do in fact utilize this in a leveraged portfolio basis but it does imply its the end all, be all.

    Lastly you can pick any stock you want at any strike price.

    Compare the spread of long equity/short call vs. short naked put and the short naked put will usually 99% of the time yield you more net premium in addition to being less costly with respect to trading commissions.
     
  8. Exactly. Leverage is a personal choice. Whether you want to sell naked puts that you do not have the equity to cover for assignment vs. selling naked puts for which you have secured by cash for assignment is up to the trader.

    Essentially selling a naked put for which you have cash secure for is like placing a buy limit order for a stock, but at a price you determine and you are paid a premium to do so.
     
    #10     Dec 31, 2012