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Thanks Sails, I do appreciate the information.
No worries, all is good...
And as a side note - what happened to Mazza? I saw he had replied to the thread but it disappeared? Tried to send him a PM to find out what happened but can't do so?
Well nice to see you have picked up on WayneL...can't go wrong there
I am not having a go at you personally, but as said before, barely any new posters get the message about what I have bolded in your quote. In fact every covered call thread has someone saying this, and another ignoring it.
If get stopped out on the CFD/stock, it is compensated by the profit in the call that we sold, no?
I think the key is with a CFD the broker, IG markets for example can provide guaranteed stop loss whereas on most derivatives exchange like CBOE/CBOT there is just no guaranteed stop loss.
They don't offer GSLOs on oppies. GSLOs on stocks can be hit and miss too. eg pre-reporting no GSLOs allowed. In the runup to reporting the GSLOs must be 20% away or something
Also you pay handsomely for the privilege (0.3% to 3%) depending on the volatility of the stock
Thanks Skyquake.
I was attracted by the GSLO at first, because with a GSLO we can defined our initial risk clearly. Without GSLO, who knows how low a stock can gap down.
But as i look into the practical issue..hmmmm. For example, because the GSLO must be at least 5% away from spot, so we can only use ITM call (OTM call does not have the extrinsic value big enough to cover the 5% loss if the stock gap down). So we select a ITM call with around 95% moneyness , but then at these moneyness, the extrinsic value is just so thin if we sell the call at bid price, and the liquidity is awful. To workaround, one can use limit order to write the call at a higher price, but there is no free lunch because the spot would have gone up too if the call price did move higher to fill your limit price.
What are your thoughts?
Cheers folks.
Thanks Skyquake.
Once GSL triggered, can't we buy back the call? Or is the concern about the liquidity hence slippage when buy back the call?
You can. But even assuming you get a fill at midpoint with good liq, (big if) The loss on the CFD leg will be greater than the gain on the oppie leg (because you were unable to hold it to expiry)
And if the market spikes thru your stop then starts reversing, you could end up paying more than what you sold the initial call for (plus the CFD loss)
Its a good strat in a low volatility rising market but once you get some volatility or some bad luck, it can really ruin everything
Thanks Skyquote. Finally i understand. I made the mistake of thinking about at expiry only.
Appreciate your explanation. Have a good night mate.
Writing covered calls over long CFD positions
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Thanks Sails, I do appreciate the information.
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No worries, all is good...
And as a side note - what happened to Mazza? I saw he had replied to the thread but it disappeared? Tried to send him a PM to find out what happened but can't do so?
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Just in case sails, WayneL, cutz, village idiot and Slouch didn't make it abundantly clear:
In my attempt to baffle and ward of evil spirits, the following is another interpretation of the trade that makes it disadvantageous (sails has already discussed this). Being in this position means you are:
Now if you sell a put out-of-money - let's take the extreme $50 as per the graph, the gamma is much lower.
Nearly all posters, who ask about covered call and its variants, nonchalantly dismiss the risk of a drop in share price. They seem to think in dollar terms, the drop has a similar effect on the option.
Observe the graph: if the stock drops to $50, the gamma, increases by moving up the slope [indicated by red] to the peak, since it is now the new at-the-money strike. This is what I mean by selling upward curvature.
So not only is the option value increasing, but it is doing it at an accelerating rate, all of which as an option seller, you don't want unless heartburn is the desired effect.
It's been established there is implicit leverage in the option itself, as indicated by this curvature. Throw on the fact that you can further leverage this position, margin wise, using options + cfd's (I'm assuming no change to portfolio allocation).
...and well the effect gets compounded when you lose...
Now unless you are confident you have an edge to overcome this e.g. statistical analysis, other than "we can't lose because there is a guaranteed stop loss", then it is best to steer clear
covered call = short put
In my attempt to baffle and ward of evil spirits, the following is another interpretation of the trade that makes it disadvantageous (sails has already discussed this). Being in this position means you are:
selling upward curvature
The plot is not perfect, but assume the stock price is currently $100, with peak of gamma distribution at $100.
The plot is not perfect, but assume the stock price is currently $100, with peak of gamma distribution at $100.
![](data:image/svg+xml;charset=utf-8,<svg height="57px" width="100px" xmlns="http://www.w3.org/2000/svg" version="1.1"/>)
Now if you sell a put out-of-money - let's take the extreme $50 as per the graph, the gamma is much lower.
Nearly all posters, who ask about covered call and its variants, nonchalantly dismiss the risk of a drop in share price. They seem to think in dollar terms, the drop has a similar effect on the option.
Observe the graph: if the stock drops to $50, the gamma, increases by moving up the slope [indicated by red] to the peak, since it is now the new at-the-money strike. This is what I mean by selling upward curvature.
So not only is the option value increasing, but it is doing it at an accelerating rate, all of which as an option seller, you don't want unless heartburn is the desired effect.
It's been established there is implicit leverage in the option itself, as indicated by this curvature. Throw on the fact that you can further leverage this position, margin wise, using options + cfd's (I'm assuming no change to portfolio allocation).
...and well the effect gets compounded when you lose...
Now unless you are confident you have an edge to overcome this e.g. statistical analysis, other than "we can't lose because there is a guaranteed stop loss", then it is best to steer clear
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Amusing how detailed explanations why this is shyte and/or mention of Greeks causes crickets to start chirping.
Then another thread pops up along the lines:
"Hey about these covered calls, they're quite good......."
Thank goodness the brokerage and slippage is poor in Aus, otherwise credit spread/iron condor seminars would be running riot!!!
Then another thread pops up along the lines:
"Hey about these covered calls, they're quite good......."
Thank goodness the brokerage and slippage is poor in Aus, otherwise credit spread/iron condor seminars would be running riot!!!
Asking here because I couldn't be bothered posting another thread and I believe the people frequenting this one can answer it.
Despite everything written here CC's still seem a reasonable strategy to me. However, I my eyes have certainly been opened to the nature of selling puts.
So I ask, (without taking into account market dynamics). Is writting puts up till the point of being exercised and then turning around and writing calls on the same share a valid concept? Or is there a few steps/considerations I may be missing?
(conscious incompetence here)
Regards,
J
Despite everything written here CC's still seem a reasonable strategy to me. However, I my eyes have certainly been opened to the nature of selling puts.
So I ask, (without taking into account market dynamics). Is writting puts up till the point of being exercised and then turning around and writing calls on the same share a valid concept? Or is there a few steps/considerations I may be missing?
(conscious incompetence here)
Regards,
J
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Well nice to see you have picked up on WayneL...can't go wrong there
I am not having a go at you personally, but as said before, barely any new posters get the message about what I have bolded in your quote. In fact every covered call thread has someone saying this, and another ignoring it.
CC's = selling puts
If you write puts first - you are selling puts naturally
If you then get exercised and sell calls on that stock - you are selling puts synthetically
Bottom line though: You are SELLING PUTS!!!
If you then get exercised and sell calls on that stock - you are selling puts synthetically
Bottom line though: You are SELLING PUTS!!!
If get stopped out on the CFD/stock, it is compensated by the profit in the call that we sold, no?
I think the key is with a CFD the broker, IG markets for example can provide guaranteed stop loss whereas on most derivatives exchange like CBOE/CBOT there is just no guaranteed stop loss.
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They don't offer GSLOs on oppies. GSLOs on stocks can be hit and miss too. eg pre-reporting no GSLOs allowed. In the runup to reporting the GSLOs must be 20% away or something
Also you pay handsomely for the privilege (0.3% to 3%) depending on the volatility of the stock
Thanks Skyquake.
I was attracted by the GSLO at first, because with a GSLO we can defined our initial risk clearly. Without GSLO, who knows how low a stock can gap down.
But as i look into the practical issue..hmmmm. For example, because the GSLO must be at least 5% away from spot, so we can only use ITM call (OTM call does not have the extrinsic value big enough to cover the 5% loss if the stock gap down). So we select a ITM call with around 95% moneyness , but then at these moneyness, the extrinsic value is just so thin if we sell the call at bid price, and the liquidity is awful. To workaround, one can use limit order to write the call at a higher price, but there is no free lunch because the spot would have gone up too if the call price did move higher to fill your limit price.
What are your thoughts?
Cheers folks.
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There is also the issue of just random movements in the stock triggering the GSL, but still having the options leg still in there.
Thanks Skyquake.
Once GSL triggered, can't we buy back the call? Or is the concern about the liquidity hence slippage when buy back the call?
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You can. But even assuming you get a fill at midpoint with good liq, (big if) The loss on the CFD leg will be greater than the gain on the oppie leg (because you were unable to hold it to expiry)
And if the market spikes thru your stop then starts reversing, you could end up paying more than what you sold the initial call for (plus the CFD loss)
Its a good strat in a low volatility rising market but once you get some volatility or some bad luck, it can really ruin everything
Thanks Skyquote. Finally i understand. I made the mistake of thinking about at expiry only.
Appreciate your explanation. Have a good night mate.