covered options

Discussion in 'Options' started by ptrjon, Dec 26, 2008.

  1. ptrjon

    ptrjon

    The only options I write are covered calls... anyone else?

    It seems like we are slightly a different breed, taking less risk, seeking income instead of growth/speculation.
     
  2. you are deluding yourself on the less risk part. covered call = long stock less premium or short put.
     
  3. You are not the only covered call writer out there. Honestly I wish there were not as many as there are. It's a very good strategy when properly employed.
     
  4. ptrjon

    ptrjon

    It's a general statement that's generally correct. A covered call is definitely less risky than a naked call. A covered put is definitely less risky than a naked put. A covered call on a stock is also less risky(downside risk) than being long on the stock without the call.

    It's Christmas time, you don't have to be so blunt, rude and wrong all at the same time.
     
  5. Actually, he's not being terribly rude! The truth is that serious options investors know that a covered call (which is only partly covered in truth) is fundamentally the same as being short a put. You are still exposed to downside risk -maybe to a lessor degree than just owning naked stock- but it still is there! Just write one sometime and see if it can protect you from a major decline like we have just gone through. It won't, I assure you.

    He's trying to give you some advice that will save you a lot in the long haul.
     
  6. ptrjon

    ptrjon

    I bought C this september with a deep in the money call. Instead of losing $3000 on 600 shares I've only lost about $1000 with the income from these past 3 months. My last $7.50 call expired so now I'm long on the stock without a call.

    Any investment is risky, but I think it's safe to say that covered calls are indeed less risky.
     
  7. How do you deal with the situation when the stock pays out the dividends and the short call is deep in the money on the record date? How to handle the assignment risk if you'd like to receive the dividends?
     
  8. Yes. It's less risky than owning stock outright.

    It is, however, not less risky than a naked put (same strike and expiration as the call).

    Mark
    http://blog.mdwoptions.com/options_for_rookies/
     
  9. Where is the profit in this trade? If the call was deep in the money there was then no time premium in it to collect. If C went up the call which was deep would move against your stock... thats a push. C went down the call moved with the stock down thats a push.

    Bottom line covered call sellers mostly got slaughtered in 2008 since the part they covered fell a lot more than the premiums they took in.. aka naked puts
     
  10. Yep, it's less risky by the amount of the premium that you take in. But since you give up most of the upside, you end up with a strategy with a lousy risk/reward ratio which can only be overcome by having better than average stock picking and/or timing skills... and if you have them, why stack the odds against yourself?
     
    #10     Dec 29, 2008