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#1
09-05-2007, 09:27 PM
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Re: articles on covered call options
[ QUOTE ]
It all comes down to what you are trying to accomplish. Take something a bit more volatile for example. AAPL closed at 136.76 today and the Sept 140 calls closed at 4.16. If that gets called away in a couple of weeks you just made 5% in less than a month. If it doesn't you bought the stock 4 bucks cheaper than otherwise and you can sell some more against it next month. [/ QUOTE ] Skindog is selling covered calls that are 30% out of the money for 1-2% per month. AAPL OCT $175 (about 30% out of the money) sell for $1.15, about 0.5% per month. Can you imagine how volatile the stocks he's writing against are? Or is Skindog doing a bit of exaggerationing? Earning 5% in a month is great, but not at the expense of being called out of your stock when it shoots way higher. In August AAPL bounced between $111 and $139. Imagine the second week of August when your Apple stock was $120 you sold some covered calls at $125 for $4. Apple closed at $127 the last day of options. The next day it was trading for $130 and a week later $139. But you got called out of your shares for $124. There is no free lunch with options. The chance that your stock will trade higher than the call price is worth something, about what you sell it for. Worse is that if you want to hold the stock long term every time it gets called your long term capital gains clock gets reset, making it more likely you'll pay higher tax rates. Plus you have to pay transaction costs in an expensive, illiquid options market that only trades in nickels. 
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#2
09-05-2007, 11:10 PM
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Re: articles on covered call options
[ QUOTE ]
Skindog is selling covered calls that are 30% out of the money for 1-2% per month. AAPL OCT $175 (about 30% out of the money) sell for $1.15, about 0.5% per month. Can you imagine how volatile the stocks he's writing against are? Or is Skindog doing a bit of exaggerationing? Earning 5% in a month is great, but not at the expense of being called out of your stock when it shoots way higher. In August AAPL bounced between $111 and $139. Imagine the second week of August when your Apple stock was $120 you sold some covered calls at $125 for $4. Apple closed at $127 the last day of options. The next day it was trading for $130 and a week later $139. But you got called out of your shares for $124. There is no free lunch with options. The chance that your stock will trade higher than the call price is worth something, about what you sell it for. Worse is that if you want to hold the stock long term every time it gets called your long term capital gains clock gets reset, making it more likely you'll pay higher tax rates. Plus you have to pay transaction costs in an expensive, illiquid options market that only trades in nickels. [/ QUOTE ] Very well said.
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#3
09-06-2007, 01:02 AM
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Re: articles on covered call options
[ QUOTE ]
[ QUOTE ] It all comes down to what you are trying to accomplish. Take something a bit more volatile for example. AAPL closed at 136.76 today and the Sept 140 calls closed at 4.16. If that gets called away in a couple of weeks you just made 5% in less than a month. If it doesn't you bought the stock 4 bucks cheaper than otherwise and you can sell some more against it next month. [/ QUOTE ] Skindog is selling covered calls that are 30% out of the money for 1-2% per month. AAPL OCT $175 (about 30% out of the money) sell for $1.15, about 0.5% per month. Can you imagine how volatile the stocks he's writing against are? Or is Skindog doing a bit of exaggerationing? Earning 5% in a month is great, but not at the expense of being called out of your stock when it shoots way higher. In August AAPL bounced between $111 and $139. Imagine the second week of August when your Apple stock was $120 you sold some covered calls at $125 for $4. Apple closed at $127 the last day of options. The next day it was trading for $130 and a week later $139. But you got called out of your shares for $124. [/ QUOTE ] How often does that happen, on average? Not very often, considering the average gain of the market is about 10% a year. In the AAPL example, he's beaten that in 3 months.
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#4
09-06-2007, 08:20 AM
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Re: articles on covered call options
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The chance that your stock will trade higher than the call price is worth something [/ QUOTE ] Duh! It's all about risk, reward, and expectation. If you aren't comfortable selling calls then don't. If you are comfortable with it and understand the risks (and rewards) you can enhance your profitability. Like I said it's more trading than investing and some people think all trading is evil. I'm a trader and not an investor so when I see a good covered opportunity I take it. When writing calls my hope is generally that I DO get called away. The real risk is the stock tanking and getting stuck with it.
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#5
09-06-2007, 08:41 AM
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Re: articles on covered call options
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Imagine the second week of August when your Apple stock was $120 you sold some covered calls at $125 for $4. Apple closed at $127 the last day of options. [/ QUOTE ] Hmmm? That figures out to a $9 gain in 2 weeks or about 7.5%. That's an annual return of about 180%. Nice trade!
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#6
09-06-2007, 11:54 PM
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Re: articles on covered call options
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[ QUOTE ] Imagine the second week of August when your Apple stock was $120 you sold some covered calls at $125 for $4. Apple closed at $127 the last day of options. [/ QUOTE ] Hmmm? That figures out to a $9 gain in 2 weeks or about 7.5%. That's an annual return of about 180%. Nice trade! [/ QUOTE ] Someone owning the stock made double the gain and can still qualify for long term cap gains. Any long term holder who bought Apple at $10 and rode it all the way up to $140 would likely have cost themselves lots of profits by selling covered calls. There is nothing wrong with being a trader, but it just seems naked options would be a better vehicle for trading than covered calls. For the long term investor you are losing upside a while lowering variance. If you need that, a better approach would be to add some bonds while keeping your equity holdings tax efficient.
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#7
09-07-2007, 05:58 AM
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Re: articles on covered call options
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but it just seems naked options would be a better vehicle [/ QUOTE ] Good luck with that [img]/images/graemlins/smile.gif[/img] [ QUOTE ] For the long term investor you are losing upside a while lowering variance [/ QUOTE ] Not neccessarily, there are plenty of uses and strategies for longer terms but you are closed minded enough that I'm willing to drop this conversation completely.
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#8
09-07-2007, 11:24 AM
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Re: articles on covered call options
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[ QUOTE ] For the long term investor you are losing upside a while lowering variance [/ QUOTE ] Not neccessarily, there are plenty of uses and strategies for longer terms but you are closed minded enough that I'm willing to drop this conversation completely. [/ QUOTE ] If you have something to add to the conversation, by all means go ahead. I'm not close minded so you don't have to take your (base)ball and just go home. Our conversation has been so far Me: covered calls didn't work out so well in August for APPL holders. You: They made $9! Me: Buy and holders would have made more. You: OMG how dare you point that out. I know so much more than you but instead of educating everyone I'm just going to stamp my feet and go away! Sounds silly doesn't it? So lets start over, what have I missed? How do covered calls generate excess after tax returns over just buying and holding the stock for long term investors?
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#9
09-07-2007, 12:01 PM
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Re: articles on covered call options
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do covered calls generate excess after tax returns over just buying and holding the stock for long term investors? [/ QUOTE ] I'm gonna get back in on this I don't think bringing up specific examples does anything to bring the discussion one way or another. I can find a mountainload of cases where writing a covered call resulted in more profit than either buying the stock by itself or writing a call by itself. Personally, I do it for stocks that I am bullish on (I wouldn't want to hold stocks just for covered call writing) if I feel both that the option provides a good reward and that the stock's raw 'volatility' isn't a good representation of whether the stock will reach a certain level. It is definitely more of a trading thing than an investment thing. Just because I'm bullish on the stocks I buy, I might be hesitant to write something like the AAPL 125 call. Yes, you get a lot of cash for your time value, but like you pointed out - it's for a reason. In my covered call writing I leave enough room such that if the stock spikes and does hit the strike price, I will be very happy with my stock returns for the month. In all cases, I use it as something of a bonus return for my investment rather than an end-all strategy. Like I said, I have a feeling that properly used, under specific circumstances that certain stocks face, covered call writing might bring abnormal returns. I don't write covered calls for every stock I own. I can tell you definitively that I've made more money using covered calls than if I had not used them.. but that obviously doesn't prove anything with my short investing timeframe. I think the most useful way of proving any point would be for either side to bring some articles or sources to the table.
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#10
09-07-2007, 01:23 PM
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Re: articles on covered call options
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Me: Buy and holders would have made more [/ QUOTE ] No. Option seller could have bought it back at 127 and been $2 ahead of the buy and holders.
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