Covered Calls

[cannox]

Hi All,
Just wondering if anyone is making any serious money writing covered calls? If so what sort of initial investment did you invest?

[SuperTed]

"serious" money in covered calls would require "serious" money tied up in underlying stock.

Personnally I think covered calls are a loosing option strategy.

[crashy]

covered calls strategy adds about 5% p.a. to the performance of your holding. It is a bear market strategy, definately not to be used in the current bull mania.

[cannox]

Yeah I can understand how a seriously bull market can adverseley affect a covered call strategy, how about a namek put strategy for a bull market and a covered call strategy for a bear market? :sly:

[positivecashflow]

If you are serious about options trading/writing, you have to ask yourself "what if I'm wrong?" Looking at the covered call and the naked put risk graph, you stand to lose a hell of a lot if you were dead wrong in picking the market direction (bullish or bearish). Covered call has unlimited risk (stock drops to zero) and limited reward (strike price minus stock price when you initiated the short call plus the premium received). Naked put has unlimited risk to infinity (if stock price gaps up = margin call) and limited reward (premium received).

Cheers,

J.

[SuperTed]

Holding stock and writing calls in a bear market is a loosing strategy because the stock generally looses value more then what the call is worth.

For me i have to make up my mind 1/ do i want to be an option trader or 2/ a share trader.

Combining both and holding stock (when it shouldve been stopped out) for the sake of the covered call is not good.

And the opposite is the same writing a covered call when the share is rallying.

I have NWS shares at the moment and will not write 20 contracts and lock myself in.

My real world experience of covered calls .Ive written 20x covered calls chasing NCP and WOW down in the past trying to cover the share loss with call premium ....ive also written 20x covered calls in front of a rallying NCP that i ended up buying back at a loss and then made up on the share trade (sell) ..

The result was not worth it, the theory in all the books looks wonderfull though ;-)

[SuperTed]

Forgot ..some people say that covered calls are good when the share is trending sideways. Hindsight is a wondefull thing as well.

Normally to get decent premium you have to write >8 weeks out or go close to the money with a smaller time frame.

To predict that a share will trend sideways for 8 weeks is well very optimistic, especially trying to get max premium at the same time.


Thats my experience anyway.

[crashy]

a lot of stocks have traded sideways for 5 years. CBA, NAB, RIO, TLS, QAN......covered calls on these would have been very profitable.

A bear market does not mean prices are falling. It means they are not in a bull market, signified by new all time highs.

A covered call strategy has LESS risk than a naked normal position, since the option premium is a buffer.

[SuperTed]

You can fix your support resistance levels as far away from the real rpice to get a "trading sideways" definition. Writing covered calls to obtain decent premium.

Have you actually bought and written covered calls on NAB? What was your buy price? Whats series did you write?

A bull put spread in my opinion is less "risky" then a covered call trumped out by all the books.

[SuperTed]

a lot of stocks have traded sideways for 5 years. CBA, NAB, RIO, TLS, QAN......covered calls on these would have been very profitable.

A bear market does not mean prices are falling. It means they are not in a bull market, signified by new all time highs.

A covered call strategy has LESS risk than a naked normal position, since the option premium is a buffer.

NAB trading sideways for the last 5 years, pretty large range for a "sideways move" definition. for example NAB last 5yrs low $22.05 - high $36.62. Include a large series of swings during that whole period. So my point is you shouldve been stopped out on the share ( if you applied stops) or exercised on your call.


Have you actually traded and written covered calls on NAB?? What was your buy price? Whats series did you write? How did you trade the last 6 months whilst it was "trading sideways"? Did you apply stops when it was in free fall from the 13th June ($30.98) - 12th August ($26.08).

Whats your strategy now to trade NAB now that it has moved into the middle of your trading range?

[positivecashflow]

A bull put spread in my opinion is less "risky" then a covered call trumped out by all the books.

Agreed 100%. Even a calendar spread if there was sufficient volatility skew would be a hell of a lot better than the c/c strategy.

[The Barbarian Investor]

Crashy-

Can you give an explanation of a Bull Spread and it's application, how about a "Protected Buy/Write" in laymans terms..

sorry if the question seems a bit basic..



The Barbarian Investor

[wayneL]

Crashy-

Can you give an explanation of a Bull Spread and it's application, how about a "Protected Buy/Write" in laymans terms..

sorry if the question seems a bit basic..



The Barbarian Investor

Hey barb, it was Superted who mentioned the spread.

It was also Ted who said the most profound statement in this whole thread;

"For me i have to make up my mind 1/ do i want to be an option trader or 2/ a share trader. "

Cheers

[positivecashflow]

Can you give an explanation of a Bull Spread and it's application, how about a "Protected Buy/Write" in laymans terms..
Protected Buy/Write
1. Buy 1000 shares
2. Sell Out of the Money Call with short term expiry < 45 days to expiration
3. Buy At the Money Put or Slightly Out of the Money Put with long term expiry > 90 days to expiration
4. Attempt to roll the short calls every month

Bull Put Spread
1. Sell Higher Strike Put
2. Buy Lower Strike Put
3. Same expiration dates

E.G.

You are bullish on NAB which is trading at $27.00. You think that it will close above $27.00 by end of January.

Sell 1 Jan 2005 $27.00 Put @ $2.00
Buy 1 Jan 2005 $25.00 Put @ $0.50
For Net Credit of $1.50

Your aim is for both put options to expire worthless so you get to keep the Net Credit.

Max Risk - Difference in Strikes less Net Credit: $27 - $25 - $1.50 = $0.50

Max Reward - Net Credit = $1.50

Share price for Break even at expiration - Higher Strike less Net Credit: $27 - $1.50 = $25.50

You are risking $0.50 to make a possible $1.50 - Limited Risk Limited Reward

Cheers,

J.

[SuperTed]

Thanks for doing that J (saved me typing ;-)

Barb,

There is a lot of info here:

http://www.asx.com.au/markets/l4/OptionBooklets_AM4.shtm

[The Barbarian Investor]

Thanks Guy's

The Barbarian Investor

[positivecashflow]

Thanks for doing that J (saved me typing ;-)
Anytime mate.

Are you actively trading the options market?

Cheers,

J.

[mikeg]

Hi all,

It has been interesting reading this Thread on Covered Calls, with comments like, "do you want to be a Share Trader or an Options Trader".

Personally I enjoy doing both. The way I see it is that if I have bought a Share for the long term, then why not make some extra income by Writing Covered Calls against it. I have found that I can safely Write at least 8-10 months of the year, earning at least 2% each Month. If the Share price rises and you are in danger of being Exercised, then you can always Buy back your position and Write again at the next Strike. If that happens then I will usually do a 2:1 Ratio Write.

I realise that to make it a viable exercise you need a reasonable amount of Shares to Write against, otherwise you are just making the Brokers rich. :2twocents

[crashy]

its best to do a buy write on low priced shares.

with stocks like TLS and QAN ts easy to buy another 1000 shares so that you can write an extra contract. try doing that with RIO!

TOTALLY dissagree with the statement "do I want to be a share trader or an option trader".

buy-write is one of about 50 strategies you can use to improve returns. why not try a few others?

[The Barbarian Investor]

Thanks again, i find the subject of options interesting and am trying to learn as much as possible.

Positive cashflow-

No not trading options at this stage, however the concept to me, has merits. I'm definetly a bird in the hand is worth two in the bush kinda person and the concept of potentialy earning monthly premuims from your shares appeals to me.

I don't have an emotional attachment to them and if i have to sell the contract when exercised (earning a premuim, plus additional value of the share)or buy them back at a reduced price to close my position would also not matter as long as i made profit.

Crashy-

In the current marketplace then, what would you percieve to be worthwhile strategies?)


Thinking along the terms of your positive cash flow/ geared strategies.

I used to be a set 'n' forget investor or buy 'n' hold and find the different trading concepts fascinating, as i still now people who have held thier shares for years, some worth less now then when they originally bought them..

The Barbarian Investor

[SuperTed]

Anytime mate.

Are you actively trading the options market?

Cheers,

J.


Yes fulltime. Mainly NWS at the moment. I think most everything else that is worth writing on is overpriced at the moment. ie banks, RIO, BHP

[Dwib]

I think most everything else that is worth writing on is overpriced at the moment. ie banks, RIO, BHP

Please excuse mylack of knowledge with regards to options. But with respect to this comment SuperTed I assume you can write because you have the shares to cover you? Hence if you are excercised you don't mind selling as you believe you can pick them up at a lower price somewhere down the track. Is that right?

[SuperTed]

Dwib...............I write naked puts and calls

[The Barbarian Investor]

Superted..

Do you trade (options ) on any of the smaller stocks listed in the options market or only the larger Blue Chips with monthly premuims?

The Barbarian Investor

[SuperTed]

I thought id already answered that ;-(

My preference is to write naked on banks, resources (BHP, RIO, NCM) and NWS. However liquidity is important not so much if they are blue chip.


Although I have traded QAN, TLS, WOW, SGB and CLS (hairy ride that one) but find them harder to get in and out for far prices >>> (low option liquidity = maker maker shafting).

[MrDollar]

hi

i am new to this and i am trying to get my hands on some information on share renting to find out wheather it is worth doing. were could a newbe go to find this information out so it doesn't hurt my head working out the jargon

thanks

MrDollar

[positivecashflow]

Here you go...

http://www.asx.com.au/markets/l4/StrategyofWeek140602_AM4.shtm

[The Barbarian Investor]

Thanks for that also PCF

Reading the A.F.R and looking at the call options pages, it's pretty slim pickings trying to find a share that is both A- Cheap and B- Has regular/monthly premuims.

Maybe I'm better off looking at Telstra or AMP ? or would i be better off with a "Protected Buy n Write Stratefgy on a smaller options share?

T.B.I

[The Barbarian Investor]

QAN - Quantas seems to be trading back at the $3.70 level..maybe all right to be a cheap entry for Covered Calls?

T.B.I

[positivecashflow]

T.B.I.

Understand the covered call risk graph...

Unlimited Risk to zero, Limited Profit Potential

Cheers,

J.

[DTM]

Hi Cannox

What I would do is make sure that the stock is at the start of a trend or there abouts. I would wait for the stock price to surge up before trying to sell the atm/otm call option. When the price pulls back, I would buy back the option. You may get two or three price surges within a month in a trending stock allowing you to buy back your options. If you get exercised, then wait for the next pull back to buy back into the shares.

I normally buy the shares and also the call option, so that if I do get exercised, I can get back into the shares at the price I started with (plus outlay for the call). The call price is always cheaper when the price is heading down.

[SuperTed]

Thanks for that also PCF

Reading the A.F.R and looking at the call options pages, it's pretty slim pickings trying to find a share that is both A- Cheap and B- Has regular/monthly premuims.

Maybe I'm better off looking at Telstra or AMP ? or would i be better off with a "Protected Buy n Write Stratefgy on a smaller options share?

T.B.I

LoL ... that is the game at the moment. Waiting for "fair value" to enter the market. eg the banks do you write a call because it is "toping" or wait for a pull back to write puts or buy/write (if thats what your inclinded to do).

Trading for the sake of trading is very dangerous.. for me tis better to sit out a month or so and then lock in several really good trades at once then one crap one. The crap ones cost you more money and lost time then sitting back doing nothing ;-)

I dont touch small stocks (puts or calls) anymore because to get good premium you have to write in the money or very close to it.

[DTM]

To find the cheaper options, you would basically have to be a fulltime trader. That's where you'll find the bargains and opportunities during intra-day trading. If you're not a full time trader, I would only invest in the options for blue chip companies, especially if see the opportunities.

[ryanmel]

coming in late on this thread but i only just found this forum....

anyways, i am writing covered calls at the moment as a means to creating an income. i have invested $100k and margined on that.

i started in november and i am averaging $6000 per month in income. after interest on borrowings and brokerage i am still coming out with fantastic returns. i am only employing a fairly simple strategy at the moment but will definitely be moving into some new strategies soon.
as for downside risk, (and i didn't read the whole thread so someone may have mentioned this already) you can always buy puts to minimise losses and as such, set stop losses. if you have written calls, you can buy them back at a low price if the share has dropped in value and sell your put or exercise your put depending on your view of the share.

[wayneL]

coming in late on this thread but i only just found this forum....

as for downside risk, (and i didn't read the whole thread so someone may have mentioned this already) you can always buy puts to minimise losses and as such, set stop losses. if you have written calls, you can buy them back at a low price if the share has dropped in value and sell your put or exercise your put depending on your view of the share.

Why buy the freakin' share at all then?

Covered call = Naked put i.e. exactly the same payoff diagram

Fence (buy share, sell call, buy put) = Bull Call spread (buy ITM call, sell OTM call)
i.e. exactly the same payoff diagram

That way You never have to have a stinking margin loan on a bunch of lousy stocks = less capital usage = no interest cost

Cheers

[wayneL]

Shoulda put a few smilies in that post...did not mean to seem agressive. :)

Cheers

[tech/a]

That way You never have to have a stinking margin loan on a bunch of lousy stocks = less capital usage = no interest cost

Wayne you know how I trade.

How could I or anyone else who trades long term on Margin do it better in your veiw?

[wayneL]

That way You never have to have a stinking margin loan on a bunch of lousy stocks = less capital usage = no interest cost

Wayne you know how I trade.

How could I or anyone else who trades long term on Margin do it better in your veiw?

Using pure options the way you trade would be too labour intensive and cumbersome. It could be done, and it may or may not increase profits, but youd have to give up your day business...or you would have to change your entire plan to suit the strategy.

I know thats not how you want it. So margined stocks fits in perfectly with your plan and the interest is just one of the overheads.

But, someone who wants to play with options is another matter. There is more than one way to skin this cat so why cost yourself interest when for the exact same payoff diagram, you can have a lot of your capital EARNING interest.

An example for the benefit of others;

Here is the payoff diagram of a fence...buy 4500 AAPL @ 72.50, sell 45 contracts $75 call, buy 45 contracts $70 put with a month to run.

Total cost about $325,000...roughly 100 grand with the margin loan, but it'll cost a months interest on $225k

Underneath is a a bull call spread...Buy 45 contracts $70 calls, sell 45 contracts $75 call

Total cost about $11,000...with 89 grand in the bank collecting interset.

Notice the payoff diagrams are IDENTICAL!!!!!!!

Easy choice for me :)

[tech/a]

Thanks Wayne.

I understand the option stratagies.

Dividends help offset interest.

[mazzatelli1000]

Hi all,

I got a group of mates who think they are going make it big in the options market....you see they recently attended a Jamie McIntyre and Peter Spann seminar - advocating covered calls and naked puts.

Should i break their hearts and give em more of a dose of reality??:banghead:

Way to dig up a dead thread Maz

Btw...i wanted to get some perspective on Oz traders trading in the US ops market....how do you deal with the different time zones, say if you were employing condors on stock indices??

I fear for my life sometimes that my strikes may have been threatened or overshot when i oversleep...call me paranoid :eek:

[Grinder]

Mazz, if it were me I would'nt tell them as you would just end up comming off as some sort of dream crusher, instead I would direct them to the posts on this forum.

I can't comment on US ops as I have yet to venture there, the night shift is a big deterent.

[mazzatelli1000]

Grinder,

mate your prolly right
I had a lil verbal with some Peter Spann devotees...i got told that the pschology of trading a naked put is MILES APART from a covered call even though it is the same payoff.

I'm starting to see wealth gurus starting to spread the love about credit spreads...without mentioning the risks that is...God help some people

[wayneL]

Grinder,

mate your prolly right
I had a lil verbal with some Peter Spann devotees...i got told that the pschology of trading a naked put is MILES APART from a covered call even though it is the same payoff.

I really hate to support the likes of Peter Sca... ummmm, Spann, but that may be true in some circumstances.

Just like there may even be a difference in psychology between a buy/write and a covered call. Yes it is just the same strategy, but the circumstances at inception could be entirely different.

A buy/write is the simultaneous purchase of stock and writing calls over the stock.

A covered call could be the writing of calls over already existing long term holdings.

If we can assign the two different tags to two different types of trader:

The buy/writer really wants the stock to go up to get the maximum payoff, as he has entered the position speculatively to collect premium and has no intention of holding stock for the long term and wants to be assigned.

The long term holder probably won't write a call if he/she thinks the stock is going up and risk assignment, rather, he/she writes the call because the he/she thinks the stock is stagnating or going down, and takes the opportunity to squeeze some income from it.

The naked put writer is generally (but not always) analogous to the buy/writer, rather than the covered call trader, therefore the psychology entirely different.

Also the buy/writer-covered call trader may use different strikes depending on the traders psychology.

The put trader generally writes out of the money, therefore the strike is below the current price. The buy/writer-covered call trader generally writes ATM or OTM calls, therefore generally at strikes above the current price. (Though I have seen some buy/write "gurus" recommend ITM strikes)

The reasons for this may be predominantly psychological, but there are practical considerations at play as well, such as margin, risk of assignment etc.

So yes, there can be big differences in psychology.

My :2twocents

[mazzatelli1000]

haha i agree

i didnt elaborate on the full discussion....it went something along the lines of

"you cant lose as much on covered calls as naked puts...at least with covered calls you can hold on to the shares and wait for them to go up...blah blah blah ...then the psychology"

Reminds me of the first chapter of Charles Cottle's book

Then again maybe im the blind one.......:confused:

[wayneL]

haha i agree

i didnt elaborate on the full discussion....it went something along the lines of

"you cant lose as much on covered calls as naked puts...at least with covered calls you can hold on to the shares and wait for them to go up...blah blah blah ...then the psychology"

Reminds me of the first chapter of Charles Cottle's book

Then again maybe im the blind one.......
:banghead::banghead::banghead:

Tell your mates that the naked put writer is going to end up with shares if the stock tanks, same as the buy/writer.

Then ask them which strike they will write the next call option at?

:bonk:

[mazzatelli1000]

:banghead::banghead::banghead:

Tell your mates that the naked put writer is going to end up with shares if the stock tanks, same as the buy/writer.

Then ask them which strike they will write the next call option at?

:bonk:

hahahaha

all jokes aside though, my mates are pretty convinced...emotionally invested. Theres 3 of em and their pooling a sh#$load of cash to start this, possibly getting more on the bandwagon.

Lets keep this post up there so any potentials at least have a chance to think twice

Back to OTHR:eek7:

[wayneL]

all jokes aside though, my mates are pretty convinced...emotionally invested. Theres 3 of em and their pooling a sh#$load of cash to start this, possibly getting more on the bandwagon.

Lets keep this post up there so any potentials at least have a chance to think twice

Back to OTHR:eek7:
Yep there is nothing anyone can do about this, 'cept hope they are smart enough to learn some stuff along the way.

[WaySolid]

Grinder,

mate your prolly right
I had a lil verbal with some Peter Spann devotees...i got told that the pschology of trading a naked put is MILES APART from a covered call even though it is the same payoff.

I'm starting to see wealth gurus starting to spread the love about credit spreads...without mentioning the risks that is...God help some peopleHey I said that. I'm no devotee of PS (though I think he's a smart guy) and would be interested why that opinion on the options needs updating?

I've never traded an option, so my understanding could be wrong and would welcome the knowledge

[stuart.mcclure]

I would have to dissagree with alot of the comments made up until now regarding the risk associated with covered calls, especially in comparrison to other strategies such as Bull put spreads.

Try riding through a correction with an account full of Bull Puts. Your going to be decimated. You may even go negative on your account after closing costs.

On the other side a covered call strategy will easily ride through even the worst of market corrections. Yes your account will fall in value but it would be hard to imagine it loosing more than half of its value.

The second thing to consider is the opportunity to roll. If you have ever rolled an in the money Bull put spread you will know how painfull this is. Your success rate needs to be near 90% to be successful. Alternatively rolling a naked put or call will usually result in further credits being put into your account as long as the stock is not more than roughly 10% above or below your call or put. This gives you a way out or a way to reduce your entry price or increase your exit price if the trade goes agianst you.

Thirdly, every strategy has its place you would not enter into a covered call strategy on a stock you believe is going to skyrocket. However history has shown us most stocks dont skyrocket. In fact the average yield from stocks is around 12%. Only 12% when it is relativley easy to yield 25%+pa through a covered call strategy, why would you bother sitting on a portfolio of large blue chip stock when you can sell calls on the highs and puts on the troughs to generate extra income from your portfolio. If the market rallies strongly roll up your calls to a higher strike so you still keep the majority of the gains or if the market tanks roll your puts down to a level your happy to buy. As long as your trading quality blue chip stocks that can withstand a market correction, your sure to do well out of a covered call strategy. As long as you are happy with 2-3% returns per month on your funds.

Just my 2c
I would class myself as an experienced options trader and these are the results i have found over the years. Before tearing my comments appart, consider maybe you are picking the wrong stocks if you are not finding the strategy very successful.

[wayneL]

I would have to dissagree with alot of the comments made up until now regarding the risk associated with covered calls, especially in comparrison to other strategies such as Bull put spreads.

Try riding through a correction with an account full of Bull Puts. Your going to be decimated. You may even go negative on your account after closing costs.
You are making the loaded assumption that a bull put trader is using the maximum position size available via margin, and therefore a thousand times bigger face value of shares than a CC trader.

Depending on your situation, that's not quite true. I have portfolio margining available to me, (SPAN) which means I can lever up CCs as much as I can lever up bull puts. Same situation if trading commodity CCs.

It also assumes the trader is stupid enough to do so. (as indeed there are) But to properly compare the risks of the two, the comparison must be made with similar bona fide money management procedures in place. This, you have not done.


On the other side a covered call strategy will easily ride through even the worst of market corrections. Yes your account will fall in value but it would be hard to imagine it loosing (sic) more than half of its value.
Not true, and the reason is contained in one of your later statements


The second thing to consider is the opportunity to roll. If you have ever rolled an in the money Bull put spread you will know how painfull this is. Your success rate needs to be near 90% to be successful. Alternatively rolling a naked put or call will usually result in further credits being put into your account as long as the stock is not more than roughly 10% above or below your call or put. This gives you a way out or a way to reduce your entry price or increase your exit price if the trade goes agianst you.

I partly agree here. One of the things I hate about OTM bull puts is the difficulty (and contest risk) of adjusting bull puts. However, rolling is not the only option and a lot depends on the strikes selected. It is possible to defend in other ways.


Thirdly, every strategy has its place you would not enter into a covered call strategy on a stock you believe is going to skyrocket. However history has shown us most stocks dont skyrocket. In fact the average yield from stocks is around 12%. Only 12% when it is relativley easy to yield 25%+pa through a covered call strategy, why would you bother sitting on a portfolio of large blue chip stock when you can sell calls on the highs and puts on the troughs to generate extra income from your portfolio. If the market rallies strongly roll up your calls to a higher strike so you still keep the majority of the gains or if the market tanks roll your puts down to a level your happy to buy. As long as your trading quality blue chip stocks that can withstand a market correction, your sure to do well out of a covered call strategy. As long as you are happy with 2-3% returns per month on your funds.
There are times and situations where CCs make a lot of sense and I fully endorse their use in those cases, but systematic buy-writing sucks in comparison to other systems.

a/ If monitoring closely for rolling opportunities, why not use the full range of option strategies available as the situation demands? ... including bull puts.

b/ The trading expertise required to turn a year in year out 25% profit (if indeed possible with systematic CC writing {and if we're being honest}) could be put to better use to make higher returns.



Just my 2c
I would class myself as an experienced options trader and these are the results i have found over the years. Before tearing my comments appart, consider maybe you are picking the wrong stocks if you are not finding the strategy very successful.
This is the best statement you've made here. Most of the CC traders I see on the Internet do precisely that, ie pick the wrong stocks (though mostly US traders). Generally, they chase bigger premium by looking for high IV situations => playing with fire.

See:

http://sigmaoptions.blogspot.com/2006/12/reasons-to-not-chase-big-cc-premium.html

http://sigmaoptions.blogspot.com/2006/12/reasons-to-not-chase-big-cc-premium_20.html

http://sigmaoptions.blogspot.com/2006/12/reasons-to-not-chase-big-cc-premium-re.html

A study done in the US (which I don't have a link for) showed that with systematic CC writing over the long term, superior returns were to be found by using stocks with the lowest IV, and therefore the lowest premiums. In other words, boring old blue chips.

It also found that CCs only outperformed buy and hold in sideways and bear markets. They underperformed buy and hold in bull markets (admittedly the study did not use rolling techniques). Over a range of market conditions, returns did not appreciably exceed buy and hold, but did reduce volatility of returns.

Traders who trade only CCs are a carpenter with only a hammer. It is only one tool that can be used. It's a good tool, but useless if you really need a saw.

Cheers

[mazzatelli1000]

Stuart,

At the risk of this post passing myself of as an option expert, nothing could be further from the truth. I am an amateur at this game.

I thought I'd just summarise some of the key points of this thread with some big quotes to make myself look intelligent...please everyone flame me mercilessly if too much BS appears...hhahahahaha


Thirdly, every strategy has its place you would not enter into a covered call strategy on a stock you believe is going to skyrocket

With that line you have hit the nail on the head with what this particular thread I think has been trying to get across - i.e. the myths surrounding CC's. :hammer:

1) Caveman tactics - its time for evolution
Some people (either thru insufficient knowledge...hehe like myself. :eek:.. or brainwashing) use CC's as the ONLY strategy even when the circumstances do not favour CC's or there are better alternatives.

As many other experienced traders here have alluded to, it is just one of many tools that should be in your arsenal.

There are often other risk profiles better suited to the market conditions and factors at that time. There are opportunities to make more than CC's with less capital outlay, with the same or less level of risk. Question is why wouldn't you at least consider it????

Choosing underpriced blue chips whose companies have sustainable earnings, strong operting cash flow and other industry specific factors would be smart, in this case you could be confident riding market corrections since the company you have elected has the operations and controls in place to survive the tough times. But then again im a paranoid fellow...i will come back to this in point 2 below.

Which brings us to the next point:

2) Cowboy selection and attitude
To compound the misery, some folks criteria for choosing the stock for CC's does not take into account all the risks presented by the position.
There are people who choose the stock based on the amount of premium that a particular option series presents.

E.g. Oh hey look LGL premiums are going for $1.50 per contract and the strike is $3 away from current price..... which seems pretty safe and even if it tanks a bit, it wont tank too much, the stock will survive a correction...bargain!!! Its frightening...I know of folks who do this...especially after they've heard certain option "gurus" speak.


On the other side a covered call strategy will easily ride through even the worst of market corrections. Yes your account will fall in value but it would be hard to imagine it loosing more than half of its value.

I hear lots of CC and naked put and hell even investors say this sort of thing..."it wont lose that much".

Its the glossing over this risk which is a large concern.

A few words One.Tel(gonski's), HIH (goneski's), Fortescue Metals Group (use to be $60 now $8 i believe - not exact figures but still), Allco Finance Group.

Im sure other traders will agree with me, the times when you think something isnt going to happen, it tends to happen. Risk management is the key. Again as wayneL has said, you wouldnt be putting all your money on one trade.


3) Be water my friend - Bruce Lee
What the great man is referring to is the ability to adapt to any situtation. The use of CC's or buy-writes by many are done systematically even when conditions do not favour it.

Your post seems to do a bull put spread vs. CC's with the tendency to lean towards the fact that CC's are more safer.

Which leads to the next point:

4) When things go wrong it's someone else's fault, when things go good...it was down to my genius


The second thing to consider is the opportunity to roll. If you have ever rolled an in the money Bull put spread you will know how painfull this is. Your success rate needs to be near 90% to be successful. Alternatively rolling a naked put or call will usually result in further credits being put into your account as long as the stock is not more than roughly 10% above or below your call or put. This gives you a way out or a way to reduce your entry price or increase your exit price if the trade goes agianst you.

What if it is more than 10%? this is not impossible.

You could say that with bull put/bear call spreads "as long as you roll up/down spread before it hits predetermined break even/stop loss points" you wont get decimated.

Some people are guns at managing that risk while others arent. Its the person managing the trade not the strategy that will determine if you get decimated.

In your case, it sounds like you would get decimated and then some if you were trading a bull put spread. Others wouldnt.
It sounds so trivial - manage risk, we all know we should but it doesnt get done very well.


5) One size does not fit all


As long as you are happy with 2-3% returns per month on your funds

Agreed. Everyone has their own risk/reward tolerance. Add to that amount of knowledge regarding options and that will determine what strategies you would employ.

However the concerns expressed in this post is, please do not advocate these things as a guaranteed 5% return a month, 60% return a year. Better yet, options arent a "get rich easy scheme", although some of the option guns here might disagree :D

Stuart, there is nothing wrong with your strategy or CC's in general. I think it hits people soft spot to read this stuff and then think " these guys are bagging out my strategy".

Lemme give you an example of an ad i saw for a bull put spread:
"How to turn 20 G's into the equivalent of $1 mill generating 10 G's in a month, and heres how to avoid losing if the share price tanks!"

No mention of Greeks -key to managing risk, no mention of possibility of loss - the rolling down and out of the spread would cover that - (the reality as you know you can get decimated), heavy marketing emphasis on returns - quoting returns on margin. Thats BS and misleading.

CC's have similar sort of marketing, except that CC's are used to cover interest payments for property investments - i have seen people sell their houses to free up money to do this sh*t. Risky or not risky??? 25% p.a. return and you choose the correct stocks, so why not eh?

Cheers

[stuart.mcclure]

Sorry I dont have time to fully reply to everything that has been stated due to options expiry today, however most of the things you are saying here are correct. I will add a few ways i maximise my returns from the strategy. Also covered calls are not the ultimate strategy i do also use bull puts, bear puts bull calls credit calls, callendar spreads, butterfly spreads, condors, and many other strategies. It just depends on the opportunity presented.

1. To avoid your price being more than 10% away you can do a couple of things. In volatile markets i buy protection a fair way away from my strike. effectively turning it into a wide pull put spread with far less contracts.

2. Roll early. dont wait for the trade to turn to crap before rolling a possition out and down. This means a stock must fall far further before you run into trouble. You can also roll out a few months at a time to achieve a lower strike.

3. Fortescue metals is trading at $10.63 after undergoing a stock split. It would be one of the strongest rallying stocks in the large cap end. Definately hasnt suffered a large pull back from $60 to $8

4. Covered calls do not suite every stock and are not always effective in every market. However look at OXR, LGL, BHP,RIO, or any other range bound highly volatile stock for that matter. These have been absolute fantastic.

5. Everyone seems to be concerned about capping your upside and stopping a portfolio from every really making any money. Why not use the calls to pick the peaks and sell a call only when you believe the stock is over valued and is likely to pull back. You dont have to sell a call every month if the stock is rallying.

[wayneL]

Let's clear something away once and for all. It's what I think we are all saying in our own various ways, and that is that in the right situation, covered calls are a fantastic strategy.

In my opinion, the right situation is on long term holdings that are not currently trending strongly higher.

I would NEVER buy stock to write a call over.

The last time I traded CCs on my own account, was on a piece of dog crap I thought I wanted to hold for the long term... that was 2 or 3 years ago now. In other words it's a very rare occurrence for me, because of the time frame I operate in.

But I run a portfolio of buy & hold, dividend paying stocks on behalf of a trust which I took over last year. It was previously in the hands of an adviser at a major broking firm. Their idea was to churn the account for as much as they could get away with.

As my remit is to generate income for the beneficiaries, I have simply written calls when I thought I could get away with it. They think I'm a wizard. In this instance they are perfect.

But lets face the reality of the covered call promotion industry. It is full of BS, nonsense, dishonesty, misrepresentation and subterfuge.

The standard line is "make 40% per year with little risk".

PFFFFFFFTTTTTT!!!!!!!! Rubbish! The sites are setup to find CC opportunities only, usually high IV situations, but ref. my links above. The wrong way to go about it.

As a "trading" vehicle, they are suboptimal. The trading expertise required to maximise profit can be better employed with other methods for superior profits.

The problem is that "options trading" is sexy and sounds fantastic at dinner table conversation... and CCs seem to be the holy grail if you swallow the hype. The thing is, it still requires some skill and knowledge (especially CGT ramifications of assignment), even for a long term b&h portfolio, otherwise they can do considerable damage. Options nooooobs are not aware of all the traps (because the sheisters usually don't teach them).

Anyway, enough ranting for now.

[sails]

Sorry I dont have time to fully reply to everything that has been stated due to options expiry today,....

Hi Stuart,

I pretty much started my options career with covered calls around 5 years ago after going to a seminar where they recommended leveraging as high as possible with margin lending to purchase shares for the sole purpose of selling covered calls. Oh, and the fees for purchasing the shares were a hefty 1% with the seminar spruiker supposedly getting 50% of the loot.

After a heart stopping couple of months with wild swings in NCP (NWS now), I closed all positions and settled down to learning about options properly and also found a more reasonably priced broker. I now mainly trade in spreads - eg butterflies, calendars.

With the benefit of hindsight and a fair bit of option trading experience, I do agree with the concept that CCs have their place especially in a portfolio which one already owns - or plans to buy and hold. Selling puts to purchase the shares and then selling calls over them can be a good strategy under those circumstances.

Anyway, that's my experience with CCs - but I do have a question for you. Recently I was running some simulations in excel mainly on the Oz banks and BHP to find the optimal time to roll a short option. I was initially taught to let it go to expiry day to squeeze the last few cents out of the short, however, my findings quite consistently showed that it was better to roll no later than the Monday before expiry Thursday. It appears that premiums in the next month become quite deflated in those last few days and there was a higher premium loss in the next month than in the front month.

Of course, a rise in volatility generally improved the odds of waiting until expiry day.

Do you normally wait until expiry day to roll the shorts - or have you also found it an advantage to roll a few days early?

Cheers

[wunglung]

CC's are great!

My solution to getting caught in a strong upward trending stock and going in the money on my sold call is to firstly admit that I am a fool for partaking in such a stupid trade, once I do this and stop crying and pull myself together I consult the charts closely and sell the stock at or near the peak (takes skill, but acheivable). This means you go naked (takes balls and confidence to this, amateurs should never do this if they dont understand the consequences) and then as the stock falls back you either buy the stock back or close out the sold call position. If you cant sleep at night knowing that you are naked then you can buy some cheap protection (buy high strike call to cover sold position).

[wayneL]

CC's are great!

My solution to getting caught in a strong upward trending stock and going in the money on my sold call is to firstly admit that I am a fool for partaking in such a stupid trade, once I do this and stop crying and pull myself together I consult the charts closely and sell the stock at or near the peak (takes skill, but acheivable). This means you go naked (takes balls and confidence to this, amateurs should never do this if they dont understand the consequences) and then as the stock falls back you either buy the stock back or close out the sold call position. If you cant sleep at night knowing that you are naked then you can buy some cheap protection (buy high strike call to cover sold position).

Let me get this straight;

1/ You make a maximum profit, yet it's a stupid trade and you're crying about it.

2/ You then become an ace technical analyst by picking the precise top, after have failed to see the coming upswing.

3/ Then flip the trade from a synthetic short put to the natural short call with almost zero extrinsic value and delta close to -1, thereby taking on more delta exposure than the original trade.

hmmmm.

[mazzatelli1000]

3. Fortescue metals is trading at $10.63 after undergoing a stock split. It would be one of the strongest rallying stocks in the large cap end. Definately hasnt suffered a large pull back from $60 to $8.

My mistake ladies and gents...quoted the wrong stock
(nervous laughter)...thats a worry:eek:


4. Covered calls do not suite every stock and are not always effective in every market. However look at OXR, LGL, BHP,RIO, or any other range bound highly volatile stock for that matter. These have been absolute fantastic.

BHP :eek7:

OXR :p:

[jayinoz]

I started writing options a year ago and it was a better move than if I held my portfolio & left it. After making approx 30% the previous year...I got a scare with Centro but got out with a low stop loss.

Having a portfolio of more weighted materials\energy and some financials I had mixed success...

From the 50+ option writes I made approx 3% pm. Always getting a good premium for writing at the money. However offset my portfolio with a 12% loss and it equals 18% up for the year- yes I know in a bear market the last financial year. Yet it was lucky timing for preservation of gaining positive interest, all up.

It not so exciting as picking a short\long call\put yet it can give some protection, and some protection is better than none. This next year I will write a few on stocks I wish to keep then take a little more risk with some other strategies. I will stick to energy then in time hope to pick the time that financials bottoms out.

PLUS you get far better premiums for writing covered calls than you did a year ago. As volitility in the markets suites the option\put pro.

I have known some guys who take out a put + call option on same stock and seem to always make a buck. Then again nearly everyone wants to tell u about their winners & not their losses. Lucky year in the worst stock market year to date for 26 years. Covered calls will need to be apart of my upcoming years strategy for Rio BHP and the more stable stocks. Use the volitile stocks for your option guesses.:2twocents:2twocents:2twocents:2twocents

[Vondelpark]

Hi Jay,

Interesting stuff. I had extensive experience with options overseas but not in the domestic Australian market. I think having options excercisable into 1000 stock is crazy, and definitely stifles the Australian market greatly.

If you don't mind me asking - are you writing calls on long stock you fully own, or margin lending to get hold of the underlying and using the same brokerage to be able to short those calls against it?

I do not have extensive domestic share portfolio as I simply do not want to tie up the cash but I wouldn't mind the scenario where I could long CFD's and write calls against those positions. Does it exist? It may well do but I am not aware of it.

Another thing - what kind of strategy do you employ now that equities got belted? I guess we are going to see bounces and while IV is high (and it is a great time to slot that premium) sharp rallies I would think could cost you if they are too close to the ATM.

Thanks for letting us know how your strategy went.

VP

[clayton4115]

hi

can you write CC on the index? can you explain to me how i would do it? i have $10,000 which i would like to start CC on the Index (ASX200).

thanks

[wayneL]

hi

can you write CC on the index? can you explain to me how i would do it? i have $10,000 which i would like to start CC on the Index (ASX200).

thanks
Just write a put... same thing. Same risk, same reward.

[clayton4115]

so i would write puts on the XJO? would i get any income from it?

[wayneL]

so i would write puts on the XJO? would i get any income from it?
You can't "buy" the index so you can't do CC's anyway. Well you can synthetically, but no point in that.

You would have to find an index ETF or index future that has options. Not sure if these are available in Oz... but plenty in overseas markets.

But do yourself a favour and do a search on "synthetics" on this site and Gooogle. Oh bugger it here is the link http://www.aussiestockforums.com/forums/showthread.php?t=11127

A CC is simply a synthetic short put.

Yes you get the same income from from the short put as the CC (presuming same strike is used), but you are still exposed to the identical downside risks that you are with a CC.

Effectively, IT'S THE SAME THING.

[wayneL]

You can't "buy" the index so you can't do CC's anyway. Well you can synthetically, but no point in that....

A CC is simply a synthetic short put.

Effectively, IT'S THE SAME THING.

OK, just because I can't sleep and I'm bored, lets create a covered call on the index (synthetically).

Let's presume the XJO is trading at 3000, which it will be at some point in the future.... :D:D

We can't actually buy the index, but we can create a synthetic long index position with options:

Buy 1 x XJO 3000 call
Sell 1 x XJO 3000 put of the same expiry

This is called a synthetic long and will be just like buy the index with two small differences.

1/ There will be an expiry date
2/ You will pay the cost of carry up front.

Now for the covered call. For this example I am going to use the ATM (3000) call of the same expiry as the synthetic long. The reason is for a further illustration of synthetics will become obvious shortly:

Sell 1 x XJO 3000 call

So the entire position becomes:

Buy 1 x XJO 3000 call
Sell 1 x XJO 3000 put of the same expiry
Sell 1 x XJO 3000 call of the same expiry

Voila; an index covered call.

But wait! We are buying and selling the exact same call and they cancel each other out.

This leaves only one option position remaining: The written 3000 put.

So I hope that illustrates the synthetics of this position.

[mtsaustralia]

In my experience covered calls are O.K, but you get hit too hard when the stock gets in a downturn.

I.e; you have 100k account, and you write cc for 6 months. If you have 5 positions, and average a 2% profit over those 6 months (which would be doing well with some loosers), then the market gets hit by 10% (like last Aug or Dec/Jan) you loose all your profits and more.

A MUCH better strategy is to use a protected buy write strategy using portfolio margin leverage, and do it with single stock futures.

Eg:

Buy SSF XYZ for $30
Buy approx 12 months put for XYZ at 30 strike
Start writing near month OTM calls.

Using PM leverage, your risk on this trade is the cost of the puts. Which, if written OTM, as the stock goes up can usually be covered in 2-3 months. Then you can write OTM calls (and roll if goes up too much) with zero capital risk.

I do this strategy and make approximately 100-200% per year on the winners, and loose a max of 50% on the losers. I usually get about 4 winners to every 1 looser... even in this market.

The reason i do it with single stock futures is that when using PM, there is no cost to holding the futures (with IB), due to there being no risk due to put protection.

Matt

[wayneL]

In my experience covered calls are O.K, but you get hit too hard when the stock gets in a downturn.

I.e; you have 100k account, and you write cc for 6 months. If you have 5 positions, and average a 2% profit over those 6 months (which would be doing well with some loosers), then the market gets hit by 10% (like last Aug or Dec/Jan) you loose all your profits and more.

A MUCH better strategy is to use a protected buy write strategy using portfolio margin leverage, and do it with single stock futures.

Eg:

Buy SSF XYZ for $30
Buy approx 12 months put for XYZ at 30 strike
Start writing near month OTM calls.

Using PM leverage, your risk on this trade is the cost of the puts. Which, if written OTM, as the stock goes up can usually be covered in 2-3 months. Then you can write OTM calls (and roll if goes up too much) with zero capital risk.

I do this strategy and make approximately 100-200% per year on the winners, and loose a max of 50% on the losers. I usually get about 4 winners to every 1 looser... even in this market.

The reason i do it with single stock futures is that when using PM, there is no cost to holding the futures (with IB), due to there being no risk due to put protection.

Matt
Matt,

Good points re margin and PM, but a couple of questions for you:

1/ Why buy ATM put and OTM call? You are relying more on the long delta to deliver your profit and you shed profit if it goes too far past the strike. yes you can roll, but a decent gap up and this has cost you money.

Why not OTM put and ATM call?

2/ What is the 100%-200% profit calculated on? Can you substantiate this figure with a worked example.

3/ What % profit on capital and across your portfolio are you achieving?

4:1 winners to losers when your structure relies on delta seems a bit incredible to me without another twist. Thems bull market figures. Is that over the year or over each expiry cycle.

Thanks

[BradK]

OK, just because I can't sleep and I'm bored, lets create a covered call on the index (synthetically).

Let's presume the XJO is trading at 3000, which it will be at some point in the future.... :D:D

Wayne,

A word spoken in jest....

[jeffish]

Hi there,
I am a newby-been trading covered calls with a collar since September with my SMSF of 86K.

Before this September I was trading options (bull put and bull call spreads and a couple of other strategies) on the ASX to mixed success for just 2 years. The premiums on options seem crappy for so long now I have my other trading account on hold.

I just want to share that I am glad to have got my money off the stinking, filthy, dirty, greasy fund managers and into the market myself where I can protect my nest egg and even turn it into a profit!

Using a SMSF I really wanted to minimise my risk and I had to follow my SMSF charter for ATO compliance reasons too!

As a result I have been trading what seems like a cross between monopoly and papertrading!

I have been fortunate enough to have been trading in this volatile market when I have the money to own the stock and buy and sell as the market moves while still protecting my stock with puts. My strategy is basically to buy stock and ATM put protection (a collar you call it) and then set our 'sell' order at 20% profit. (when I don't have time to daytrade and watch the market closely.

One trade I did last month was to:
First buy NCM Dec 20.00 put for .80 when it was trading at about $23.
Buy 1000 or 1 contract at $20.00 when the price pulled back
Sold Nov 24.00 call at .94 close to expiry and maximise my profit
Profit $4,140 (minus brokerage)

Now I still have a December 2008 20.00 put worth about .20. In anticipation of NCM pulling back in the next 6 weeks or so I just bought a Jan 09 put for .80 to repeat the process all over again, as my view is that gold (and in fact the whole market) will be volatile over the next month or so.

I have been trading this way for the past 3 months and have over 100 k which is about 15% or 60% pa. I could probably only do this in this market so I am open to new strategies!

What amazes me is the amount of people who hold stock and do make their money work for them- even using covered calls as you point out is not the best strategy.

Please make a distinction for me:
By 'covered calls' do you mean you have not bought put protection on stock but you are writing the call on the underlying stock? If so, this seems risky as their is a big downside risk for a minimal gain. What do you reckon?

please excuse my naivity if all this is old 'news'. I am a plodder.

Jeffish

[cutz]

Hi Jeffish,

My impression of a covered call is buy the stock and sell the call with no put protection, and it’s generally viewed as put on the trade then wait for assignment.

I started out with options towards the tail end of the last bull market writing calls against my existing portfolio without follow up strategies. My plan was if I got assigned I could buy back the stock or write a put, I quickly discovered that this was an s*** strategy for obvious reasons.

:2twocents

[BradK]

Hi there,
I am a newby-been trading covered calls with a collar since September with my SMSF of 86K.

Before this September I was trading options (bull put and bull call spreads and a couple of other strategies) on the ASX to mixed success for just 2 years. The premiums on options seem crappy for so long now I have my other trading account on hold.

I just want to share that I am glad to have got my money off the stinking, filthy, dirty, greasy fund managers and into the market myself where I can protect my nest egg and even turn it into a profit!

Using a SMSF I really wanted to minimise my risk and I had to follow my SMSF charter for ATO compliance reasons too!

As a result I have been trading what seems like a cross between monopoly and papertrading!

I have been fortunate enough to have been trading in this volatile market when I have the money to own the stock and buy and sell as the market moves while still protecting my stock with puts. My strategy is basically to buy stock and ATM put protection (a collar you call it) and then set our 'sell' order at 20% profit. (when I don't have time to daytrade and watch the market closely.

One trade I did last month was to:
First buy NCM Dec 20.00 put for .80 when it was trading at about $23.
Buy 1000 or 1 contract at $20.00 when the price pulled back
Sold Nov 24.00 call at .94 close to expiry and maximise my profit
Profit $4,140 (minus brokerage)

Now I still have a December 2008 20.00 put worth about .20. In anticipation of NCM pulling back in the next 6 weeks or so I just bought a Jan 09 put for .80 to repeat the process all over again, as my view is that gold (and in fact the whole market) will be volatile over the next month or so.

I have been trading this way for the past 3 months and have over 100 k which is about 15% or 60% pa. I could probably only do this in this market so I am open to new strategies!

What amazes me is the amount of people who hold stock and do make their money work for them- even using covered calls as you point out is not the best strategy.

Please make a distinction for me:
By 'covered calls' do you mean you have not bought put protection on stock but you are writing the call on the underlying stock? If so, this seems risky as their is a big downside risk for a minimal gain. What do you reckon?

please excuse my naivity if all this is old 'news'. I am a plodder.

Jeffish

Not to be a wet blanket, but two words: Beginners luck. The worst kind of luck. Watch out mate.

Hope you make a killing. A friend once said you need a $5000 education - either pay for it, or the market will take $5000 from you. Either way, you get your education.

Brad

[mazzatelli1000]

Hi there,
I am a newby-been trading covered calls with a collar since September with my SMSF of 86K.

Before this September I was trading options (bull put and bull call spreads and a couple of other strategies) on the ASX to mixed success for just 2 years.

Little did you know the covered call + collar is actually a synthetic bull spread
SO before and after September you have been trading the same risk profile.

The difference is primarily in management

The stock + short call = synthetic short put
Then you buy a lower strike put

So this is very much akin to you bull put spread, and of course this can also be created using calls



I just want to share that I am glad to have got my money off the stinking, filthy, dirty, greasy fund managers and into the market myself where I can protect my nest egg and even turn it into a profit!


Good but now be very very cautios otherwise you'll lose it



I have been fortunate enough to have been trading in this volatile market when I have the money to own the stock and buy and sell as the market moves while still protecting my stock with puts. My strategy is basically to buy stock and ATM put protection (a collar you call it) and then set our 'sell' order at 20% profit. (when I don't have time to daytrade and watch the market closely.


As mentioned this is a synthetic bull spread - so your outlook in the market is currently bullish???
ATM put protection in this environment means you'll be spewing some excessive premium for your hedged downside



Please make a distinction for me:
By 'covered calls' do you mean you have not bought put protection on stock but you are writing the call on the underlying stock? If so, this seems risky as their is a big downside risk for a minimal gain. What do you reckon?


Yes a covered call is just a synthetic short put - no downside protection

I do congratulate you on your success so far!!!

Do some more research ---- its dangerous times.... since the Black Swan has tended to turn up more frequently this year :eek:

[sails]

Little did you know the covered call + collar is actually a synthetic bull spread
SO before and after September you have been trading the same risk profile.

The difference is primarily in management

The stock + short call = synthetic short put
Then you buy a lower strike put

So this is very much akin to you bull put spread, and of course this can also be created using calls


Good but now be very very cautios otherwise you'll lose it



As mentioned this is a synthetic bull spread - so your outlook in the market is currently bullish???

ATM put protection in this environment means you'll be spewing some excessive premium for your hedged downside...

There is a technical difference between the collar and a bull call spread - cost of carry (interest) is prepaid in the long call whereas it is usually calculated daily on the stock even if on margin lending.

If the stock tanks and the stock position is closed, interest will cease on any margin component and any other proceeds from the sale would then attract interest in the bank account. However, there is some risk of losing the prepaid cost of carry in the long call if the market moves down causing that long call to be FOTM... :2twocents

PS - also falling interest rates would hurt the long call if it was purchased when IRs were higher.

[wayneL]

PS - also falling interest rates would hurt the long call if it was purchased when IRs were higher.

"Rho"

A Greek we've had the luxury of ignoring for a few years. Another one to consider these days.

**Wonders if cost of carry will become an extinct concept for a while as our lunatic governments drive interest rates to 0. :eek::eek7:

[mazzatelli1000]

"Rho"

A Greek we've had the luxury of ignoring for a few years. Another one to consider these days.

**Wonders if cost of carry will become an extinct concept for a while as our lunatic governments drive interest rates to 0. :eek::eek7:

I wonder what it would be like to trade options say in Argentina or Brazil and having to deal with Rho extensively :eek:

[sails]

"Rho"

A Greek we've had the luxury of ignoring for a few years. Another one to consider these days.

**Wonders if cost of carry will become an extinct concept for a while as our lunatic governments drive interest rates to 0. :eek::eek7:

Cost of carry is something I realised was fairly relevant to writing covered calls especially if using margin loans - which was being heavily promoted a get-rich-quick-scheme few years ago when I first got into options.

The sold call only has the risk free rate factored into it, however cost of carry (interest) on the margin lending component was around 2-3% higher than the risk free rate. Bad enough having the stock at market risk without being on the back foot with interest as well.

However, as we all know options are a trade off. If we replace the stock with a long call, we are effectively pre-paying the cost of carry (interest) for the duration of that long call. If the markets tank, there is a risk of losing the cost of carry in the long call. However, if the stock position is closed out, we have only paid interest to the day it is closed.

Food for thought...

[mazzatelli1000]

Cost of carry is something I realised was fairly relevant to writing covered calls especially if using margin loans - which was being heavily promoted a get-rich-quick-scheme few years ago when I first got into options.

The sold call only has the risk free rate factored into it, however cost of carry (interest) on the margin lending component was around 2-3% higher than the risk free rate. Bad enough having the stock at market risk without being on the back foot with interest as well.

However, as we all know options are a trade off. If we replace the stock with a long call, we are effectively pre-paying the cost of carry (interest) for the duration of that long call. If the markets tank, there is a risk of losing the cost of carry in the long call. However, if the stock position is closed out, we have only paid interest to the day it is closed.

Food for thought...


I say this goes into the gotcha thread!!