Thoughts on Covered Calls and Puts

Discussion in 'Options' started by jwcapital, Nov 10, 2008.

  1. Given the volatility of the current market, I agree with others that "holding" tradings to expiration can be costly. Many option traders are programmed to hold at least until the Friday before expiration. Let's suppose that the ES is headed downward to test recent lows (today's close around 920 and recent lows 834-837). Now entering a covered put, say sell the DEC 920 put and sell the DEC ES at 920 for a credit of about 58.00. Now the market proceeds to 835..the trader is thrilled and counting out the earned premium for the four-week period ($2900.00 for 1 contract). Of course the ES bounces off the lows and proceeds upward to test the 1070 level. The trader has to exit somewhere below that level to avoid blowing out his account. Another losing trade. Rolling up is futile. Now suppose we look at this trade differently. Suppose I choose to exit this trade when the ES hits 835. Your profit on the ES FUT is $4250.00. Your approximate loss of the put is about $1700.00 for a net of $2550.00. The PUT's delta increases from .5 to about .7 or .8. In other words, for every 5 points the ES moves, the put moves only 2 points. So, this profit can be realized in a couple of days. Close the covered put trade and forget about holding it to expiration.

    A story: I am sure all of you remember what happened on Martin Luther King's B-Day. The Friday before I entered a covered put at short 1220 for the ES and short the FEB 1225 put Sold four of these. By the end of Monday, I was up $7200.00 unrealized profit. But I was stupid. I'm thinking that I will just hold this trade to expiration. Fortunately, I realized that getting out was better. So, I waited until Tuesday. By then, the FED came to resuce and the market began to recover. Got out with a $5500.00 profit. So, any comments about using the covered put or covered call--where appropriate--for short-term trading?