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Old 09-05-2007, 02:02 PM
DesertCat DesertCat is offline
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Join Date: Aug 2004
Location: Pwned by A-Rod
Posts: 4,236
Default Re: articles on covered call options

well, here's what I'm saying - the stocks I'm writing covered calls for can rise 30% and still won't reach the strike price - and I'm being paid about 1 or 2% a month. If I wrote within 10% of the strike price I could get 5 or 6%. I have no hard data to support it for you, but I wouldn't be surprised at all if calls were overpriced for some stocks.

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Can you name the stocks you write against? It sounds like you have some very volatile holdings, once again I doubt there is a free lunch. You are getting big premiums because the risk of getting called out is relatively high.

For example, KO is $54. The October $57.50 calls last traded for twenty cents. That works out only to about 0.37% premium (not counting transaction costs) for almost 6 weeks exposure to only a 6.5% move. Of course KO is a low volatility stock that rarely moves, but every so often some news will drive it up much more than 6% in a short period.

Some expensive premiums are for stocks with binary futures, for example a drug company that has a blockbuster drug in testing and the test results will either make the company worth zero or 2x current price. If you owned a company like that covered calls wouldn't make much sense because you'd be giving away most of your upside while retaining all of the huge downside risks.

I do believe that some options are mispriced and smart options traders can be significantly +EV if they know how to find specific opportunities. But if you are just writing calls because you own the stock, odds are the price fairly reflects the best estimates of future volatility.
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