Has anyone analyzed covered call writing results?

Discussion in 'Options' started by Eliot Hosewater, May 18, 2006.

  1. I'm sure this has been discussed somewhere but I haven't seen it.

    Let's say you decide on a strategy to write covered calls on the QQQQ. You buy them today at 39.40 and sell Jun 40 calls at .60. In June it has gone to 40.50 so you get called. You got the premium of .60 plus .60 on the underlying. You then buy again at 40.50, so you use up 1.10 of your 1.20 profit. If you keep doing this with the same results you will wind up chasing the QQQQ's up with little or no profit after commisions.

    Has anyone studied this? If so, have they analyzed what happens when this is applied to different stocks?

    Say instead of QQQQ you start with stock XYZ. You make a little profit but decide next time to buy stock ABC, which has just increased by a similar amount. Is the result the same?

    I'm just wondering if you actually make anyting with this strategy in a slowly rising market.
  2. Covered calls do well in sideways or slightly bullish market.t

    They underperform the index in a strong bull market and lose less in a bearish market (depending on stock selection).

    Results will vary depending on your individual stock selection and risk management skills so you may do better or worse.

    So it is not whether covered calls work, it is whether you can apply the strategy and limit your risk and avoid chasing high IV stocks which can have large downswingds as well.
  3. cnms2


    And it's not a conservative strategy.
  4. It must be. Schwab told me so, plus they let you do it in an IRA.

    :) :) :) :eek:
  5. MTE


    It's a horrible strategy from a risk/reward point of view. You risk is all the way down to zero on the stock less the credit, and your profit is capped at the strike.
  6. Actually my question was specifically if this works on a steadily rising security if you keep getting called and repurchasing the same one over and over again. It would seem at first glance that you would be spending all your profits to buy it again.

    I was asking because I saw a book on Amazon with a title something like "Covered Call Writing with Q's and Diamonds".
  7. Choad


    GATEX (Covered Call fund) vs S&P, 5 year:

    <img src ="http://ichart.finance.yahoo.com/z?s=GATEX&t=5y&q=l&l=on&z=m&c=%5EGSPC&a=v&p=s" />
  8. MTE


  9. About 2-3 years ago I backtested a covered call strategy and found very similar results to what the GATEX fund or the CBOE buy-write index would suggest.

    Effectively what you are doing is converting the "normal" distribution of equity index returns (it is leptokurtotic, however) into a skewed distribution - the upper tail gets smaller relative to the downside tail.
  10. cnms2


    Ask Schwab for a written and binding guarantee of your account. They should put their money where their mouth is.
    #10     May 18, 2006