Post deleted by Mat Sklansky

[mrbaseball]

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why sell calls that offset gains from your underlying position as the price of that security increases??


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Well? They don't neccessarily offset your gains. Say I own a stock at $100 a share. Lets also say I'd like to sell it at 105. Lets also say the 5 weeks to expiration 105 calls are trading at 2. If the stock trades above 105 at expiration I not only get to sell my stock at 105 I get to keep the $2 from selling the option meaning I really sold it at 107. There are lots of variations on this but the general gist is you are adding value. The best situation is when you want to stay long the stock and it keeps going up and you keep selling calls each month that never quite get reached. Of course the downside is if you really wanted to stay long and got called away missing a significant portion of a rally.

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why does selling calls reduce time premium?

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What selling does is push down implied volatilities. It's supply and demand. If all the orders are coming in to sell the market makers will continuously lower their bids. This pushes implied volatility down and subsequently the option will have less time premium. The opposite is also true buyer push the prices up increasing implieds.

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further, that is only 1 side, what happens to the price of puts as the price of the underlying increases and thus implied volatility related to puts?

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As stocks are rallying implied generally drop across both the put and call spectrum. There is no fear and there is no panic so nobody is rushing to buy which increases implieds. Plus the synthetic market keeps these in line. If I buy a put and sell a call at the same strike I am synthetically short the stock. If I can do this at a discount to the price of the stock I can just buy the stock and lock up certain profit. There are interest and dividend implications to this however all of the market makers use delta sheets with which they can calculate all of this in a glance.

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why would you expect calls to go down right away as prices fell given the above discussion (of covering)?...i thought just above you noted that as prices fall drastically, people tend to cover their short positions in calls and thus push up the price so i'd think call prices would increase as price falls like that.


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The point I was trying to make that in a pure panic situation you can throw deltas out the window. I was trading TBond options during the 87 crash. TBonds went limit up 3 days straight which is enormous (10 full points) and 25 handle out of the money puts were going up in price.

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in a rising market, the desire to sell calls increase? why?? if i'm long something and the price increases

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Okay this is what I answered first. Buying out of the money calls is pretty much a sucker play. Unless you might know something about Hilton [img]/images/graemlins/smile.gif[/img] If you think a stock will just keep grinding on up the most profitable way to paly it is with covered calls. Until of course implieds get so low you aren't properly compensated for the risk of getting called away. I have a couple of stocks in my personal portfolio I constantly sell calls against. If you get lucky sometimes you end up with free stock [img]/images/graemlins/smile.gif[/img]