Consider a long term portfolio invested in stocks diversified (15 to 20 stocks), selected and managed according to the usual rules. Stocks with a specific condition: an average long term historic volatility i.e. between 30 and 50% roughly. Each stock is hedged with a long term put (6 months or more), strike OTM just under the ATM strike, additional investment cost: roughly 5 to10%. You sell immediately an ATM call for the next expiration date (with at least more than 30 days). You manage closely these positions. You donât necessarily wait the expiration dates. Each time one of the stock is up or down 5 points, that is the difference between strikes, you roll up or down (buying your outstanding call and selling the ATM call). In the first case itâs a cost but it is limited by the premium already collected and the premium of the new call, but in the same times you earn the total of the 5 additional points on the stock. In the second case itâs a substantial profit on the calls but you loose on the stocks more than the profit on the calls, and less than the 5 points. You can afford it if you are long term invested and protected by the puts. (The puts are important mainly to keep your spirit up these days and protect against a meltdown like THC, and you can afford it since you collect premium on the calls). On one hand you have the stocks invested long term and wait for the improvements in the US economy (or should we give up everything and invest in US Treasuries?). On the other hand you regularly collect premium from the sell of the calls according to the fact that 80% of the time the market doesânot trend. This additional profit should normally reach 20 % yearly vs the initial investment in stocks, much more vs the real risk (investment costs less strike of the puts). Of course if you are in an bear market the balance between both side of your portfolio wont be so rosy but, waiting for improvements, you can take advantage of the cash collected for your living. May be something is wrong ? Where are the errors ?
Have done this, It doesn't work too bad. I use it with leaps or a straddle with leaps and then sell the near month call. You can improve it a little by following it with a parabolic SAR for sale and repurchase of the calls. If you get a good down run you can repurchase the call if it hasn't expired and sell the put, ride the remaining call back up and then go again with the now cheaper put and the higher priced call to sell against the one you rode up. It has worked pretty well on DELL for some time because of its' range. For the time that you have the straddle with the call sold against it it is a directional trade. I haven't tried it in a rising marked with selling puts for the short term but probably will. The time decay on the short, near month option kind of offsets the time decay on the leaps so you need some price movement to profit. Once in a while the volitility skew will help but very seldom. I stumbled on this when I had a straddle on DELL that was going no where and I like to study a trade and see how I can repair it and came up with this and it worked. I have done it on several other Leaps as well. What you end up with is a leap that is fully paid for in a few months. You need a stock that moves around some and has sufficient premium in the option.
I will add that a couple of years ago a friend of mine wanted to try this exact strategy. We worked through something similar to what you have, be short the atms. Did fine for a week even in one of those nasty Nasdaq death spirals, stock was csco. Sold the atm 20 call for 2, bought stock at 20, stock fell to 18.50, rolled down to 17.5, breakeven was now 16.80. Not too bad but then he decides, on his own, to do a covered call on another stock(some POS) using maximum leverage. The cisco plummets down to fourteen, bottom for that plunge, he gets a margin call. What does he do? Buys back the 17.50 call and sells a leap two years out. Basically, fucking himself and unable to regain any of his capital on the rise back up to 20. He would have done very well over last year and a half by selling a covered call in csco every month. However, he traded out of it and dropped it bitterly. I'll say again don't use leverage and stay consistent.
Lol, yeah. When I was on the execution side options, we had a customer who was very successful doing this, he ran a hedge fund. A non-institutional guy I know used this strategy but with a broker who held his hand. He was like 75 years old. My brother does this once in a while, I think he was pissed that the last company was taken out, thereby, limiting his profits.
Interesting feedback. But as a matter of principle I keep it straight and simple Consistent is the key I don't use leverage but I could. It's not going to increase the risk in a disproportionate way. I don'try to improve what the market is giving. I am not going to sell put for exemple after a good run down... I don't want to be directionnal. I just want to sell premium (covered). My main risk (however limited by the puts) is the US economy or that the US stock market won't meltdown, Japan Style, for the next several years. At the end when the market has a good run up, the account is rising only at half speed. The reverse is true when it falls down the account losses are half of the one on the market (but in this case you have the put protection for the worst cases). When the market is in a trading range, may be 2 third of the time, you collect the premium. It's not super brilliant but it seems working ???
My main risk (however limited by the puts) is the US economy or that the US stock market won't meltdown, Japan Style, for the next several years. At the end when the market has a good run up, the account is rising only at half speed. The reverse is true when it falls down the account losses are half of the one on the market (but in this case you have the put protection for the worst cases). When the market is in a trading range, may be 2 third of the time, you collect the premium. It's not super brilliant but it seems working ??? How are you losing anything with the put protection? And how is your account rising at "half speed" when you have sold an at the money call? You should be losing nothing on the way down and gaining no more than sold premium on the way up. Please explain
any Covered Call strategy = short naked put with two times the transaction charge. Do the math you'll see. No free lunch! If you live with options long enough you will soon come to realize that there is no advantage through strategy alone. Dr. Zhivodka