Mini Options - Covered Call

Discussion in 'Options' started by fr0st2k, Apr 9, 2013.

  1. fr0st2k


    I've been playing with options for about 2 years now...Lets just say that I contributed $$$ to a 2 year long options class.

    Anyway, with mini-options, I can finally look at the big guys for covered calls.

    I am particularly interested in AMZN and GOOG.

    I like goog for the long run and I'm a bit scared of AMZN right now. If the market takes a hit, I feel like amazon is due for a bit of a drop.

    Anyway, like I said, mini-options have allowed me the ability (with my limited investment fund) to start selling covered calls.

    My question to you guys is...have you ever tried doing a compounded covered call investment?

    As in, you look at SOLELY premiums, and share/share price, whether positive or negative, has no bearing on your investment strategy.

    I made an excel sheet which looks pretty enticing. I'm just afraid there is something I am over looking.

    With a starting investment of 10k, based on ~80$ a week google call premium, you can make 17k profit off premiums alone in the first year. This is assuming you add 10k throughout the year (this is not counted in profit).

    I added a 1.7 margin multiple to the stock buying power to limit the possibility of margin calls.

    With a stock like Goog, and doing this on a weekly basis, it seems pretty foolproof. Though again, I feel like I may be missing something crucial.
  2. benjjj6


    I'm not sure I follow what you are advocating, could you try explaining in a little more detail.

    Otherwise, surely the problem is when the stock moves against the calls that you have written, or do you own the stock or are you entering long calls also? Have you factored this in?
  3. :confused: The only reason to write a call option is to generate income on stocks that you now own. The stocks that you own should be uptrending stocks, with new higher highs. This way, when you sell the option and you have the shares called away, they will be called away at a higher price plus the premium you received for the options. Sounds like you are over thinking the trade. Find the stock, buy it, sell the option and wait and see what happens at the end of the week.
  4. fr0st2k


    Thanks for the feedback.

    It seems as if I've successfully confused everyone.

    My thought process is that, with a starting principal amount, you can, overtime, continually add to your overall stock position in 10 share increments by re-investing the covered call premiums you sell weekly. In a nutshell, this compounds over a given time to an exponential growth rate.

    While stock price has a very minor effect on the overall strategy, it can essentially be disregarded for this, 'experiment.' This is because the only thing that matters is how many 10 share increments you have and the premium you receive for each covered call you write.

    So, you start with $10k. You purchase 20 shares of GOOG, then write a covered call at the beginning of a new week. You spend 16000(margin?) on google shares, and receive a premium of $160 for the call.

    If google hits your strike, you make additional income, and immediately rebuy in at the new price. This is the 'minor effect' where you end up losing a bit. I believe, that in the long run, since this is google stock, it should have a minor effect and you should 'even' out on losses when the stock price jumps past your strike and youre forced to buy in at a higher share price the next week.

    If google misses the strike, you keep the shares and rebuy.

    After 13 weeks, assuming you invest $200 dollars a week to your account, you will have enough to sell buy an additional 10 shares of GOOG, and sell an additional covered call for more premium, upping your weekly profit to $240.
    (13 * 180 = $2340 in premium profits alone)

    11 weeks after that, you can buy another 10 shares, upping weekly premium profit to $320.

    9 weeks after that, you get another 10 shares.

    etc, etc.

    I believe the excel doc should make it easier to understand. YOu simply adjust commission number to whichever 'n' you will be collecting. My weekly estimate was $80 dollars, although you could do a quarterly $600, then each row would be a quarter rather than a week.
  5. OK, so you pyramid your way up the chart using Google stocks. What is the ultimate goal? what are you trying to accomplish? Any trading method will work if you know what you want out of it. What is your aim?
  6. fr0st2k


    The goal is to increase your account value overtime with as limited risk as possible.

    I've found that I am terrible at guessing which direction a stock will go. This strategy would eliminate the need for guessing since its profitability is based purely off premiums.

    And personally, I believe long-term google is one of the most solid bets on the market right now.
  7. Some food for thought...I think a key question to ask yourself is "Would I be comfortable instead selling GOOG puts?" If not, then this strategy may not be for you--long stock with covered calls written against it is synthetically the same as selling puts. The risk is when the stock goes down, and one need only look at AAPL to see what can happen; that stock may never get back to its $700 peak. So you might own more and more shares of GOOG over time, but if the price keeps declining, where does that leave you?
  8. If you do not own the stock it makes no sense to buy stock to write calls on it.

    Sell the put instead.
  9. There is a nearly infinite repository of the "short the put over the CC" threads on here, so no need for another. Yeah, short the mini put. I run a book of OPM in CC and short put strategies. I would not limit myself to such a strategy with personal funds, but many investors have long-held shares at a minimal cost basis and use CC as a means of adding a coupon and deferring the tax.

    Sell ATM puts. Assume you're going to be assigned. If assigned, take the shares and sell up and out calls. Here's where you don't want to short ATM (post assignment of shares) for the CC.

    Do not trade if you're uncomfortable shorting the (initial) ATM put. Do no sell more OTMs to achieve the same prem as the ATM.
  10. It does if you're expecting an increase in div% and you're in LEAPS.
    #10     Apr 12, 2013