covered calls are the “safest” options strategy in a lot of ways. you won’t blow yourself up. but at the same time, no offense quant, but you seem to be hard up for $$ and you do realize 1 call = 100 shares of stock… so to even write 1 you need the capital to be long 100 shares of whatever. not sure how big your PA is, but my guess is this might be a bit of a constraint? volatility is way up now, calls and puts are expensive, so yeah, you could generate a bit more income. but as someone said it above- wait til you have the position in your account with a covered call when it goes through the roof and you get called away. my first one like that where it really hurt i think was alcan a few years ago when it got bought out. i hated covered calls then. it’s a boring strategy in a lot of ways. and it doesn’t let anything that really wants to run RUN. opposed to matt above, if i play, i tend to write shorter term calls (1-2 months max) and then roll them. this imo makes a lot more $$ than sitting on longer term covered calls waiting for them to expire. but txn costs, etc… you have to have enough shares where it makes a difference and then pick your strikes in terms of do you want the thing to get called away (taxable event), do you want to just generate a bit more income and go pretty far OTM, or are you trying to really protect yourself from a downturn (write ITM if a stock has run up a ton but prepare to lose that stock if the px doesn’t fall south- and if that’s the goal, maybe buying a put is better?). you can hit me offline quant if you want to chat options at all. you wouldn’t blow yself up with covered calls like you could with a lot of other strategies, but just not sure in your PA if you’d exactly get a crazy pick up either where this is going to be great for you.
Oh, and not all securities have options written on them. They have to have some minimum market cap for the exchange to trade options.
selling longer term deep OTM covered calls is not necessarily the “safest” strategy yes it feels like free money, but it also locks you into holding capital in that security. people who sell covered calls tend to be risk averse… and are very unlikely to sell the stock (and either cover the option or go net short the call) even if fundamentals are changing or the market is declining like in 2008 if you had sold deep OTM calls, you collected a very small premium (lowered your cost basis by a few 100 bps maybe) but you were locked into holding stocks during a rapid market downturn (as opposed to just being able to make the decision that you want to get out of the stock)
Bannisja, Thanks for your insight. First I will use some play dough in a paper account since I need to learn how to do it. Now that I have a free summer, I am free during market hours to practice trading. Since I’ve never dabbled in options, I figured now was the time to begin and further my skills. Sadly you are right, I’m a bit hard up for $$, but I do have a small nest egg that I’ve built that I can write options on. VTI was the position I am considering writing a call on. It last traded at $56. Let’s pretend I wrote a far OTM option at $66. 1 contract would be $18 (100*.18). Not too much money ($11 after trading fees) but it is a start to learn. If the market rallied the position got called, I would essentially sell at a (66/56 - 1) 17.8% gain. Selling high is what you are suppose to do, right? Overall I’m still a noob, and with all the open time on my hands, I wish to carefully learn more about option trading among other things. Next fall I’m covering the Telecom sector of my schools $2m MCB fund, so I’m also getting up to speed with the industry, valuation, modeling, and so forth.
yeah that’s right in theory. but for all of $11 (taxable mind you unless this is in your IRA), why on earth would you cap your gains at all if we start the next crazy dot com bubble and this thing rips to 100 or whatever? now if you think this market sort of sux right now and you think VTI won’t move and you tell me you want to write $55’s or $57.5’s, make the 2-5% monthly/bi-monthly (i’m using hypotheticals- i haven’t even looked at this stock and have no idea what sort of volatility it has) and be ok to get called away, sure, that to me sounds more interesting at least to me once you start to annualize things. so yes in theory your example above is fine- if you had 100 shrs of VTI and your wrote your wayyyy OTM call, you could pocket enough for a # 1 super sized and maybe a mcflurry at the end, but to me that’s not enough juice to make me cap my gains anywhere. my weakness (or love) in options is writing naked puts. in these markets, though, while premiums are pretty nice… i’m living on the edge every options ex and think i need to reel it in a bit until we start to trend upwards again.
VTI is the total stock market ETF by Vangaurd. So it would be quite the run for an index to rip up to $100. More than anything, I wish to learn. I may just practice with the paper trading account.
http://www.amazon.com/New-Insights-Covered-Call-Writing/dp/1576601331/ref=sr_1_4?ie=UTF8&s=books&qid=1275414533&sr=1-4 No real “new insights” but it is a good book. They cover most of the topics you need to know with this strategy, including trying to sell expensive volatility.
Let’s say you own a 100 shares of a security and write a covered call contract on it. This security happened to be BP, and you wanted to dump it when the fire broke out on one of it’s rigs. If you have an outstanding option on it, are you allowed to dump it, thus making the covered call a naked call?
my suspicion is that your broker is going to force you to unwind your option position
CPierce Wrote: ------------------------------------------------------- > my suspicion is that your broker is going to force > you to unwind your option position Agreed. generally they dont like positions that go to negative infinity without infinite capital supporting that position.
Some allow it to happen - you just have to be authorized for it. TDAmeritrade has different levels - I think Level I trading is like covered calls. Level II might be buying calls and puts (finite losses) and then maybe Level III is naked calls. Not totally sure here, just a guess