• Australian (ASX) Stock Market Forum

Hello and welcome to Aussie Stock Forums!

To gain full access you must register. Registration is free and takes only a few seconds to complete.

Already a member? Log in here.

Covered Calls 5 years on

Discussion in 'Derivatives' started by fanga, May 8, 2019.

  1. fanga

    fanga

    Posts:
    6
    Likes Received:
    6
    Joined:
    May 4, 2019
    Hey Gang

    Just a quick question about Covered Calls. From my research across the forum here and other places, it appears that Covered Calls haven't been talked about for a while (at least 5 years).

    I've been researching different trading approaches for different parts of my Financial plan and Covered Calls seems to be a winner for a particular part of my plan. But I am curious as to why there hasn't seemed to be much talk about them recently.

    One important aspect of my Secure plan is to cover my monthly expenses. These expenses are currently covered by a business I own and run but I am looking to make a change which means I will no longer be drawing a salary from the business.

    From all my research and a month of analysing deals with regards to covered calls, it appears this approach could handle income generation enough to meet my monthly needs and something I could achieve fairly quickly over the next 6 to 12 months.

    Whilst most of my research has shown that covered calls may not produce a consistent income due to multiple factors, my question is do people still use covered calls to generate income as part of their plans?

    I'm not looking for specifics but more general opinions on whether Covered Calls can and still do produce steady income. Obviously, there are many things I need to take into consideration and I will be but wanted to get the general vibe on what people felt 5 years on.

    Thanks heaps
    Fanga
     
  2. cutz

    cutz

    Posts:
    1,740
    Likes Received:
    18
    Joined:
    Aug 10, 2008
    Hello and welcome,

    Do you already own stocks and planning selling OTM calls against them ?

    In my case I started out with covered calls but eventually discovered it wasn't the best fit for me, I have since adjusted my approach.
     
    fanga likes this.
  3. kahuna1

    kahuna1

    Posts:
    523
    Likes Received:
    265
    Joined:
    Jun 18, 2004
    I did look .... and do like the idea, but time has changed them.

    A lack of liquidity is one issue. Second and more importantly selling covered calls, the premium has sucked when I wanted to sell them, or grant a call. Even at the money ones .... I prefer to get say a risk free sort of one granting one with a bit of time on it .... over big stocks unlikely if not impossible to be taken over such as the big 4 banks. One side, granting a calll 5% above current prices, getting say 1.5% or 2% for it, and if its exercised, your selling at 5% above the market .... if NOT ... you get the 1.5% premium and doing it 4 times a year ... a good thing.

    Conversely ... you get exercised ... granting PUTS covered fully by cash and granting a put at 5% below the market and again getting say 2% for granting it ... happy to be exercised buying into a stock 5% cheaper and if not .... you pocket the 2% ....

    Good strategy ... however as I said I found either the RISK premium you got NOT to match the actual risk and NOT giving me enough granting the option .... or the say banks trading in the $25-30 range ... selling the calls when the price is up there .... or the puts when its down at buy levels .... again ... part the actual price you get not enuf, too much work and finicky ... or the market wafting in levels that say at $27.50 and middle of the range, granting an option 15% out of the money is a waste of time for a loose loose situation.

    Of course things change and announcements and so on can and will make massive gaps in this. Granting calls ... as long as its unlikely if not impossible they are taken over ok ... but most stocks even things you doubt can be taken over, eventually do get some insane premium added.

    If anything I prefer the dividend shuffle and kn0owing say a stock pays a dividend in May or goes EX in May buying into weakness in Feb one can get not just the 7% yield once, but often twice, buying and getting the dividend and then flicking at small profit and doing the same for a stock paying dividends in July and then going back to the second dividend for the first example ... May and then November ... and doing this over say 10 stocks if not 15 ... so your holding 10 .... and then flicking and buying another 10 ... less hassle than options and their issues.

    Anyhow hope this helps.
     
    fanga, Skate, peter2 and 1 other person like this.
  4. fanga

    fanga

    Posts:
    6
    Likes Received:
    6
    Joined:
    May 4, 2019
    Thanks @cuts and
    Thanks, Cutz. I'm so happy to find this forum. A wealth of experience and information.

    My investigations so far have been to Buy Write and it seems for this approach to us ATM options as these provide the best value over the short term.
     
  5. fanga

    fanga

    Posts:
    6
    Likes Received:
    6
    Joined:
    May 4, 2019
    Hey Kahuna

    Thank you so much for sharing your experience. Very much appreciated. I'm taking into account what you have generously shared as I paper trade the system to see if it's something i want to take on.

    Are you talking about a lack of interest in buying the covered options you want to sell? Do you find it hard to sell options in this case?

    Thanks again
     
  6. kahuna1

    kahuna1

    Posts:
    523
    Likes Received:
    265
    Joined:
    Jun 18, 2004
    Yes exactly. Outside say the top 20 stocks, the liquidity sucks. Even in the top 20, same thing. If I go to say NAB options today ... calls ... I suspect not many have gone through.

    Checking ... welll May $25.50 calls .... too short in terms of time ... but only trade is at basically zero ... with the share at $25.85 its low ... it has an intrinsic value ... in the money by 35 cents .... the $25.50 calls traded at 47 cents and likely when the stock was middle of the range so a mere 2 cents value ...

    Going to say June ... 25.51 traded last at 19 cents .... BELOW the bloody value ... obviously part of some spread ....

    Go to say Sept with good time value ... no real trades ... other than the other side of the idiotic June trade ... a well in the money call ...

    Only other trade of note is in march 2020 .... giving a massive 9 month option ,,, away ... a call at $26,00 strike for a mere 81 cents. So its barely above the market ... BARELY ... 5 cents ... and you only get 3% or a touch more ?

    Well for me, get nicked and ... go away is my response. Its more likely with a range of say $24-30 on the stock ... that its too cheap ... to sell even there at $26-..

    I would hope and expect to sell say a $27.50 call in Sept for at least 50 cents to make it worth anything. Instead the valuation and close is 19.5 cents. Basically 40% of what I would demand for granting unlimited liability ...

    Of course your covered by ownership of the shares, but these option prices and lack of implied volatility paid along with ultra low interest rates make it not worth my while to grant them.

    As I said prefer to go ... ok rates stay here ... at $25- NAB at say $1.66 conservative dividend ignoring franking ... tax free its 6.64% ,

    Its about to pay its dividend so post 16th May i think it goes ex ... price will drop the 80 cent plus dividend and I am happy, to take the risk downside wise ... v a 6.64% yield, when and if it gores up, where do I reduce or sell ? It depends on if your playing say getting g the dividend and twice a year for a few months your long around dividend time and then go to another stock paying its dividend in say August and doing the same ....

    So two times 6% is 12% .... hopefully you buy into very weak days or months leading into dividend being paid so your well into the money at dividend time and can sell out at a capital gain ...

    Anyhow, no ... having looked options, not great. Price too low.

    Just looked at the put side ... granting even puts ... still too low ... ex dividend NAB close to $25 ... I get less than 1.2% for a June PUT ? Hardly worth it ..

    Sept ... $25 put ... much better 84 cents, as one would expect granting puts ... but still ... just marginal given the extreme volatility we saw the last 12 months.

    Hope this helps
     
    cutz, cynic and fanga like this.
  7. fanga

    fanga

    Posts:
    6
    Likes Received:
    6
    Joined:
    May 4, 2019
    Thanks, Kahuna

    Yes, I can see that now with volume being the issue. NAB has very little volume traded.

    I've been watching Forteque Metals (FMG). They have the same problem. Wasn't a factor I was picking up on while paper trading the strategy.
     
    kahuna1 likes this.
  8. cutz

    cutz

    Posts:
    1,740
    Likes Received:
    18
    Joined:
    Aug 10, 2008
    Hello,

    In my opinion there's a difference between volume and liquidity, liquidity is provided by several market makers across the top stocks, fills are good, especially with spreads, volumes are spread out across a wide range of strikes therefore seem low if looking at a particular strike.

    Agree with kahuna1, the risk/reward carrying a covered call / short put doesn't seem worth it at the moment.
     
    kahuna1 likes this.
Loading...

Share This Page