First time writing covered calls

Discussion in 'Options' started by ZEAK, Jan 9, 2008.

  1. ZEAK


    I have a small stock portfolio with a full service broker. I approached him about writing some covered calls to generate income, he advised against it. But I am still interested to do it, maybe with my IB account? Is this possible? Can I write calls on stock held with another firm?

    Any suggestions if/how I should go about writing my first covered call? Been doing some reading about options, quite a lot of info.

    Since the stock in question has sold off quite a bit, I was thinking about selling some puts, with the strike below the next support level.


  2. ZEAK


    Just got a very informative email from the nice folks at TOS, and found out that this can not be done. I can not write calls with one broker, and have the stock at another. It would be the same as writing naked. So, I guess I will just try to learn as much as I can about covered calls so that the next time I do speak to my broker, I can give him all the reasons why we should write calls.

    Can anyone spit a few at me to help me get going?

    Thanks much.
  3. Why do you need your full service broker if you want to do your own trades?
  4. Yes, its a great way to generate a better return and the safest option strategy (they even let you do this in retirement accounts). If you do it right, the worst that can happen is your stock is called away from you for a profit. The downside is you might leave some money on the table and you will have to find another place to put the cash from the stock sale.

    I would not write puts on the stock because it is down, unless you have the appropriate option trading level in your account, you wont be able to anyway.

    If you want to try some different strategies you can write covered calls and use some of the proceeds to buy puts to hedge.

    The only reason I can think of off the top of my head as to why he might not want you to do it is because the stock has dropped in value and you might not get a decent premium because you will need to sell OTM calls to minimize your chance of being exercised. If you dont mind getting the stock called away you can get some nice premium for ATM or ITM options, but you will need the stock to stay range bound or go lower. Hope this helps.
  5. Sorry, your case it can also be called away for a loss...but you still keep the premium so it lowers your cost basis.
  6. MTE


    Well, to put it mildly, that's open to debate.

    It's one of the worst strategies you can think of, your upside is capped and you keep all the downside of a stock and pay double transaction costs on it!

    Don't sell covered calls just so you can recover some of the loss, it may end up costing you more than you think.
  7. Covered call writting is considered "safe" because you can't "lose" money you have already invested(from the option point of view NOT the stock that is covering it). The flip side is that you are giving up your upside above the strike plus the premium.

    Options appear to be very simple on the face of them and in concept but are actually VERY complicated and the risks and rewards are difficult to account for if you don't have a full understanding.

    If you spend the time to read all you can and study them they can become a very valuable tool for making money. Otherwise you stand about a 90%+ chance of losing money (do you LIKE those odds?)

    with all that being said if you are bound to hold the stock despite its move downward and you plan on holding the stock even if it continues down than options may be a useful tool to hedge your stock. Just don't forget that if you bought the stock with the hopes of selling it at a higher price you probably will lose out of some of that profit if you were correct to begin with about the stock price going higher.

    Lastly, covered calls are almost always better than shorting puts IF you enter into both trades correctly.

    Best of luck to you .
  8. Jaques


    Sell short and write put>protective put seems practicable now.
  9. ZEAK


    Thanks for the thoughts.

    The reason I need a full service broker is, well, been with him a long time, back when all I ventured to invest in was mutual funds. He has made me money, even though his minimum comish is 150 bucks. The only time I did not make money (as much as I should have) is when I went against his advice.

    His main reason for not writing calls on my holdings was that his commission is too high to make it worth while, AND the fact that I do not understand options well enough. He said that if my stock DID get called away, that is one commission, then if I wanted to buy it back I have to pay commission AGAIN. So right there, thats $300 I am out, and I dont know what the stock would be trading at, at the time I want to buy it back, so possibly more losses.

    But I would also like to acquire more shares of this stock, and mentioned selling puts to try to generate some cash while waiting to get the shares at a better price, but he was against that as well. Does anyone have a good reason why this is a bad idea?

    He just suggested that I continue to save my money and then when I have enough, buy the shares out right at that time.

    It just seems like a waste capital, to have it sitting there, going down in value (for the moment), if you know what I mean.
  10. ZEAK


    Could you give me an example of how I would use options to hedge my stock against down moves? Would it just entail selling puts?

    #10     Jan 11, 2008