I’m about to get involved in covered calls. I notice you prefer one month just OTM calls yielding 3-5%/month. I find this strategy offers very little downside protection and it would be easy to quickly slip into a loss position. I’m a novice but writing 6-12 month ITM or ATM Canadian bank calls with much larger premiums makes sense to me as it offers greater downside protection, more time to react to a downward movement, a greater opportunity to collect dividends and a greater chance of having my shares “called away” which to me is a plus as I only collect my maximum profit potential when that happens. I may even consider OTM calls if I think the share price has a good chance of going up. I would be happy if this strategy yielded 15-20% annually. Your comments would be greatly appreciated Anna. Thank you from Vancouver, BC, Canada
Hi Alex – many thanks for your quetsion and I would suggest the following brokers for covered calls – firstly have a look at http://www.optionsXpress.com who also have various free resources and I have found their option tables very easy to understand.
Hope the above helps.
Regards.
Anna
February 22nd, 2009 at 3:39 pm
I’m the one from Vancouver who asked for comments but your answer doesn’t pertain to my question? I asked you to comment on the wisdom of a 6-12 month covered call strategy?
March 12th, 2009 at 1:33 am
Hi Myles
Firstly many thanks for your comment and apologies for any mix up – we have recently transferred from a Drupal site to WP and the switch over was far from easy – unfortunately one or two questions seem to have got mixed up in the move, of which this appears to be one so many apologies. I will answer you back on email shortly which I hope is OK – kind regards Anna
March 15th, 2009 at 8:47 pm
Anna/
I can’t seem to find this dealt with anywhere.
I sold an option (covered call) which I bought back (at an increased price) a week before expiration. With a week to go and the stock price still rising, is that option worth anything or nothing?
Thanks,
NG
May 12th, 2009 at 1:35 pm
I’ve been writing calls for a number of years and here’s my advice:
Since you are writing the call and therefore benefiting from the escalating time decay of the front month, I would only go 3 to 6 weeks out on equities. ATM is the sweet spot when you are the seller.
Things I have learned from buy writing: Buy the stock in the lower 3rd of the channel, and immediately sell the ATM call looking for 3% to 5%. Realize juicier premiums indicate volatility and may signal a dramatic move in the near future. Look for stocks that trade in the $14 to $50 range. Use screeners to find candidates with good returns. You want stocks that are going sideways or trending slightly upward. Don’t bind youself in an obligation by selling calls on a downtrending stock. Avoid creating a covered call on a stock during a month with earnings.
This is also a good strategy for stocks you are already holding that you want to protect from the downside. Sell calls at resistance and the option will protect your losses by almost 50% when you sell ATM. You can buy back the option at support to end your obligation to deliver the stock and lock in your profit. Realize that sometimes crazy things happen and someone may exercise their option at an irrational time…taking your stock away. Some people buy OTM puts every month as insurance instead, eliminating an obligation on a stock they want to keep.
Ideally you will go to expiration and be called out and you just find another candidate for your cash. If you aren’t called out and the stock remains above its support line, wait for it to rise toward resistance and sell another call on an up day. If at anytime the stock falls below its support or 8 day sma on high volume especially as the overall market pulls back, buy back the call, sell the stock and either buy a put or short the stock and ride it down to the next support level.
Some people like to buy back the call when the stock does a parabolic run up. There is a risk the stock will not continue its run and may fail the breakout returning to its channel. In this case, you will experience a double loss of premium from closing the call and the loss in the stock from its high. I have found it is generally not productive to buy back calls on stocks that break higher. Just be patient for expiration.
There are other gymnastics to correct a covered call that goes south including buying back the call and immediately creating a spread using the stock as part of the long leg when it begins to rise again. I have had some success at this but the stock must rise. I have found a timely unwinding and simple exit is the best way to preserve capital. You can determine if you want to speculate on the downside depending on your technical analysis, comfort level and ability to react in a quickly descending price movement.
June 17th, 2009 at 4:05 pm