Covered Calls 5 years on

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

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.

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.

Thanks @cuts and

cutz said:

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.

Click to expand...

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.

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.

kahuna1 said:

A lack of liquidity is one issue.

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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

fanga said:

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?

Click to expand...

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

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.

fanga said:

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.

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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.

Fanga,
Welcome to the forum.
Funny you mention its been quiet over the last 5 years with CC's.

I was a definite noob and rookie 5 years+ ago and looking back at my posts back then was such a newb and naive to it all.

Theres so many things to take into consideration with options (whether buying/selling).
Whether its worth while will depend on your individual circumstance.

Ive traded so much over the last 5+ years that I really like options and prefer to sell options over many other methods of trading. Definitely not for everyone however.

If you're buying selling stock rather than writing options on stock you already own have you considered US equities?
I find brokerage cheaper on them however more importantly the volume and liquidity on them far higher.

All the best and profitable trading.

Good points mentioned by other members so far...

I also like to add that the brokerage for options trading is quite high, usually $30 plus range. This makes it hard to make back the brokerage on options trades unless you are trading large quantity of contracts on most stocks.

Just wandering if anyone know: is there index options offered for ASX200 or XAO or similar indices ?

aus_trader said:

Good points mentioned by other members so far...

I also like to add that the brokerage for options trading is quite high, usually $30 plus range. This makes it hard to make back the brokerage on options trades unless you are trading large quantity of contracts on most stocks.

Just wandering if anyone know: is there index options offered for ASX200 or XAO or similar indices ?

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https://www.asx.com.au/products/index-options.htm

cynic said:

https://www.asx.com.au/products/index-options.htm

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Not a lot on that page, but I saw ASX200 there. Cheers.

"Covered call learning the hard way"
CC is perhaps one of the most widely marketed strategy under banners like " Get a monthly income/ Rent your stock " etc
It was even marketed as a "Moo cow" strategy by a mass marketing seminar sellers few years ago ASIC banned his company after few years ( Take a protected equity loan purchase shares and sell monthly expiry option
However there is a great downside if not done properly and many forget to mention that risk
Doing CC in AUS has to deal with one more thing huge brokerage and liquidity
any way
the risk are bets described as " As a Option seller ( even if covered) you can eat like a king every month but one day you may **** like an emperor!

The premium received by a CC may be great first time around but if stock goes down by huge no then in subsequent months the premium available at the strike closer to your original may be so tiny that it is not worth it or If you choose a strike below your coast base ( in the subsequent rounds of CC) and if stock rallies strongly you are still in trouble
So stock selection / strike timing etc if not learned properly and if one only concentrates on first yield things can get messy

mjim said:

"Covered call learning the hard way"
CC is perhaps one of the most widely marketed strategy under banners like " Get a monthly income/ Rent your stock " etc
It was even marketed as a "Moo cow" strategy by a mass marketing seminar sellers few years ago ASIC banned his company after few years ( Take a protected equity loan purchase shares and sell monthly expiry option
However there is a great downside if not done properly and many forget to mention that risk
Doing CC in AUS has to deal with one more thing huge brokerage and liquidity
any way
the risk are bets described as " As a Option seller ( even if covered) you can eat like a king every month but one day you may **** like an emperor!

The premium received by a CC may be great first time around but if stock goes down by huge no then in subsequent months the premium available at the strike closer to your original may be so tiny that it is not worth it or If you choose a strike below your coast base ( in the subsequent rounds of CC) and if stock rallies strongly you are still in trouble
So stock selection / strike timing etc if not learned properly and if one only concentrates on first yield things can get messy

Click to expand...

Very good points mentioned. I have also seen some so called "Guru's" making this sound like a risk free way to earn an income from your shares. It's probably not bad as naked selling of options but still very few understand that there is downside to this Covered Calls(CC) business, especially if the market takes a big fall while CC's are written against all of your blue chip share holdings.

aus_trader said:

very few understand that there is downside to this Covered Calls(CC) business, especially if the market takes a big fall while CC's are written against all of your blue chip share holdings.

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Yes definitely lots of risks that people dont realise as beginners. If the market falls on stock you already had then thats not as bad as it would've happened anyway. Its when people buy the stock specifically as a CC strategy and get burnt.

zac said:

Yes definitely lots of risks that people dont realise as beginners. If the market falls on stock you already had then thats not as bad as it would've happened anyway. Its when people buy the stock specifically as a CC strategy and get burnt.

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With stocks you own without CC written on, you can sell them in a market downturn without worrying if those CC's may get called if the unexpected happens. Also people can over-leverage and buy much larger quantities of stock in order to write covered calls on to earn the income premium.

What's 99% of cover call Traders simply do not understand is that any time you are short options you are selling volatility risk.

Long term, if you sell that risk too cheaply, you lose over just holding the stock. If you want to profit long term you have to become good at selling volatility risk into decreasing volatility for the term of the options.

Looking at the income aspect of it is simply just the wrong way to look at it and you will end up having your ass handed to you.

Another thing which may come as a rude surprise to some is that unless you are doing short-term buy/writes, there are tax implications.

Anytime you realise cash you are precipitating a tax event. This should be factored into how you go about this strategy especially if you are writing calls over long-term Holdings.

I would also add if you want to get the best from their strategy don't just write the damn thing and wait for it to expire. You can crank returns here by keeping a close eye on your Greeks and being more active when appropriate.

But once again it comes down to predicting actual realised volatility and the price you received for it. If you're no better than a coin toss then your additional returns are going to be marginal at best.

You have to get good at predicting the probabilities of volatility so it's probabilities upon probabilities.

The whole idea of a monthly income of x% from covered calls is just so blinking dangerous, reach most eventually discover the reality of.