Best way to protect any downward movement from wipeout is to do a bull put spread (selling a put and buying a further OTM put. This move even lowers margin requirements compared to other similar spreads. Even if the market gaps downward to zero, you are covered for a max loss (spread between the long and short put minus the premium received). Bull call spreads (debit spread) protects downside as well as bull put spread. I used to do covered calls 10 years ago when the market only moved upward. Made lots of money. Now, it might be wise to purchase an OTM put to go along with your covered call. I am not a fan of shorts for the gap down scenario is the same here. One other thing about covered calls. If the market makes a huge move in the upward direction, you may consider exiting the cc, and taking your profit--remember the market could reverse. For example, two Martin Luthur King holidays ago, I placed 4 covered puts on the Friday before. I received about 12,000 in premium. The market dropped 60 points over the holiday. I exited the combo first thing Tuesday for a 6,000 profit. Then later, the FED stepped in and the market rebounded almost back to Friday's close. Can't be a pig. My point: every option strategy needs to be monitored.
IB has a Trader Dashboard on top of every page. You can have Cushion displaced there. And somwhere it is documented that if cushion falls to 10% IB will send an alert. IB will liquidate only when Cushion is negative. My cushion has hardly fallen below 50%
How much risk capital should one use in a single trade? http://www.elitetrader.com/vb/showthread.php?threadid=206664
Thanks for the suggestion. On top of covered call I will in future sell a put and by one close to this. Because here there is no motive to earn some premium.
I wouldn't do that for two reasons. 1. By selling a put vertical (selling a put and then buying a lower strike one) in addition to the covered call you are actually adding more risk to the downside. That is, you are now holding two bullish/neutral positions, which both lose if the underlying falls. 2. You obviously don't understand the risks involved in any of the option positions, so before proceeding you should educate yourself.
MTE Thanks for your blunt advise. I was thinking of buying a put vertical. Because I donot understand risks involved , I have started this thread. I am scared as well of the risks and that is one reason why I donot use 50% of my cash. But your points well taken.
OK, buying a put vertical is a different thing, but still, I wouldn't go out and start putting on positions on top of positions. Don't forget that if you hedge away all the risk then you are left with no return beyond risk free rate, which is effectively zero. Personally, I wouldn't risk 1 cent of my account if I don't understand what I'm doing.
Margin and margin cushion are two different stories. Initial margin is 50%. IB's margin cushion is (equity minus maintenance margin) divided by liquidation value.
Osho I also trade the weekly.(most short the weekly and long monthly) But I dont do do covered call with long stock.I hold slightly deep in the money option . weekly calls die fast in my opinion compared to puts. 30th Sep-Thursday- end of the quarter option expiry 1st Oct-Friday-1st week option expiry. Weekly has high gamma and delta and slighly higher volatality. Only Theta loss assists the short seller. I have thursday expiring SPY114 puts& SPY 114 calls (hope fully dies) If SPY closes below 113 ,I have to shell out more than premium taken. (of course my short 114 call expiring will cushion the impact) Similarly if SPY close above 115.50-similar loss . Kind of SPX 20-30 points range box.Big movement in one direction means loss. Also have TLT 105 put expiring Friday. GDX options is tricky- I had OCT 55 call and when they collapsed few days ago and bounced,sold OCT 1st 55 calls around 80c.Now my OCT 55 call is not compensating the loss by short weekly 55 call. Just trading SLW in the long side and recovering some what. To hedge SPY options (instead of SPY stock -1000 shares $114000) trade BGU (long) or SPXU (short). Kindly post the trade details so that we can discuss using greeks. http://simpletechtrading.blogspot.com/2010/09/long-bonds-sep-1st-to-15th-down-16th-to.html
Thanks MTE I want to continue weekley covered calls. Please tell me what I can do at the best to protect myself, without getting a zero return.