Printing dollars writing covered calls only to buy them back cheaper.

Discussion in 'Options' started by KINGOFSHORTS, Sep 18, 2008.

  1. I am not typically a derivative guy, I mainly long/short equities.

    But I decided to play a different approach and sell to open buy to close calls on my equities.

    Stick a limit order, wait till it gets filled and turn around stick a buy to close limit order and wait till it gets filled pocketing some nice bank.

    Obviously you need a good amount of shares to make this profitable enough to make it nice and worthwhile. So is this only unique due to this crazy market?

    Obviously volatility has been high lately but its not a bad way to make a pretty safe ROI on some good bluechips.

    I forgot now that the SEC wants to crack down and start limiting shortselling etc.. how will this affect premiums for calls?
  2. 1) It will not help. It may not hurt, but if market makers are unable to short stock as a hedge when they buy calls, they will be less willing to buy calls and the prices will decline.

    2) I like writing covered calls as a learning strategy, but it's not a 'safe' strategy.

    But, if you intend to hold the stock for years to come, it should work out well for you.

  3. r-in


    If you are holding regardless of what happens to the underlying, or you honor your stop on the stock it can be easy change. Don't use the covered calls as a way to stay with a stock that is getting killed. They can and do stay down for a long time. I know a guy holding CSCO from $50. He can write calls for a long time to come before he writes enough premium to get to B/E on the stock. I also can say I have done the same on AOL a longggg time ago. I normally took a 10% stop on my swing trades, but thought I had a great one with AOL. I took a 50% loss, writing calls for 6 months maybe brought it down to about a 45% loss. I could have gone for writing a lot closer to the price, but the couple times I thought about it I would have been called and still ended up with the same % loss.
    Point being it sounds great, but don't use it as a reason to hold onto a loser.
  4. That'll work about 50% of the time on average. It's really not that easy.
  5. It wont effect the price of the call at all since call / put parity is a given
  6. Basically, if you can't short a stock, call put parity doesn't hold anymore.

    It will be hard to delta hedge short puts and long calls. :)
  7. Can you "get around" that by trading single stock futures? :confused:
  8. I agree with nazz...I think this lock on shorting is going to draw alot more attention to SSF as offered at One Chicago. SSF are much more popular in Europe than here in the US. Brokers have not pointed their customers towards SSF as means of shorting a stock because the brokerages make huge coin on the interest rates they charge customers for shorting stocks now.
  9. just21


    How was SSf today?
  10. If it exists...but it will be interesting to see behaviour a stock you can't short sell and its future. Future price won't behave as usual because if future price decreases, you won't be able to buy it and short sell the stock. Relationship between both would be flawed.
    #10     Sep 19, 2008