covered calls-- make sense?

Discussion in 'Educational Resources' started by marketsurfer, Dec 27, 2012.

  1. From 12/29/2000 to 11/30/2012:

    SPX index is flat price to price:

    BXM (S&P500 buy wrte index) would have returned a total of 41% (3% annualized).

    SPX index returns 2.55% annualized, mostly from dividends.

    HOWEVER: the BXM created almost 300 short term taxable events. the SPX only created 12 and those were taxed at long term gains. So your compounding on the BXM would be worse over the long run.

    This is missed on most individual investors. Taxes matter a lot.
  2. Yeah, many investors do not consider taxes-- a critical part of planning. Thanks!
  3. For my money there are a lot better ways to trade than doing CCs...but for certain situations they can make sense.

    Such as you have a stock you want to sell. But you aren't in a big hurry...maybe it is a decent name with a good dividend. IOW it isn't a stock you would expect to drop 20% over night (but then you never expect that...). Just sell a ATM or slightly OTM 2 or 3 month (as an example) Call. Might as well get paid to sell. And if the stock keeps dropping, keep selling calls up until your basis, or just get out.

    Or if you are extremely bored and very patient, you can play the NP-CC game. Sell a Put, then if/when assigned sell slightly OTM Calls until the stock gets taken. Rinse and repeat. This has the effect of getting paid to buy low and sell higher. Pick the "right" stock here, of course. If it crashes, the game isn't so fun...

    Good trading to all.
  4. Forgot to mention you can juice returns a little when doing the NP-CC strat. If you don't mind the chance of owning more stock, after you are assigned on the first NP you can sell a strangle, instead of just the CC. Sell an OTM Put and an OTM Call. You of course keep both prems in any case, but if the stock goes up the Put stays OTM and the stock is sold. If the stock drops, the Call stays OTM and you get more stock but the two prems help.

    Sell the strangles until the stock is gone, or you don't want to buy any more. You may have to adjust strikes/months to get enough prem to make it worthwhile.

    There are lots of wrinkles and other stuff you can do, but for someone just getting into options the above simple strategy may make sense.

    I have done this strat before and done okay but like I said, there are better ways to trade IMHO.