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  #1  
Old 11-24-2007, 11:05 PM
ahnuld ahnuld is offline
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Default Why dont value investors write more covered calls?

Seems to me that if most value investors go into a position with an idea of true intrisic value and will sell and move on when the company reaches that value, much like buffett recently did with petrochina, then they should be writing calls whenever they enter the position at the price they targeted as IV.
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Old 11-25-2007, 12:02 AM
SuperWhale SuperWhale is offline
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Default Re: Why dont value investors write more covered calls?

This assumes that their valuation would not change based on news.
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  #3  
Old 11-25-2007, 12:05 AM
stinkypete stinkypete is offline
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Default Re: Why dont value investors write more covered calls?

not necessarily.

writing covered calls may force the investor to hold the position longer than he wants to, tying up capital. this is especially true for long-term calls. and writing short-term calls won't bring in much additional revenue if the target price is significantly higher than the market price.

if the investor believes the company is undervalued, he also believes the call is undervalued (assuming its priced "correctly" given the market price of the stock)

events between the writng of the call and its expiration may change the company's value significantly. for example, assume you own stock in company C because you believe its worth $50 if event A happens or $20 if it doesnt happen. you believe the probability of it happening is 50% and the stock is currently priced at $30. owning the stock is clearly correct, but writing covered calls at a price you believe is too low would be silly.
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Old 11-25-2007, 12:42 AM
DesertCat DesertCat is offline
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Default Re: Why dont value investors write more covered calls?

Buffett wrote puts on KO once when the price got low, but not low enough to buy more. And he's got billions in long dated index puts (ten years or more) that essentially force him to buy the index if the price drops 30% or so. The problem with writing puts like this is tying up capital. In Buffett's case he's got insurance float that might give him some long term flexibility about commitments like this.

But I've never heard of him doing covered calls. I've never done them because my stocks are too small to trade options on. But the essential concept is intriguing. As SuperWhale and StinkyPete point out, it doesn't work on any speculative positions whose value may change dramatically based on news.

Typically covered call writers write very short dated covered calls. This means they have to be written close to the current stock price, to capture any significant premiums. But if you buy KO at $60 thinking it's worth $90, you need to write calls at $90. But even the short dated $75 KO calls are only pennies. So $90 calls even out a year or more would likely be worth only a tiny premium.

So I think it only works if the stock is getting near your IV estimate and then you can write calls every month until the stock is called. Assume you bought KO at $40 thinking it was worth $65. Right now you could make 35-45 cents a month writing $65 calls. Or you could write $62.50 calls for about $1.25.

Either way, it's a rare situation and won't add to your results much.
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  #5  
Old 11-25-2007, 12:46 AM
Chrisman886 Chrisman886 is offline
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Default Re: Why dont value investors write more covered calls?

Just short puts. Why write covered calls? Aren't transation costs more?
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  #6  
Old 11-25-2007, 02:03 AM
Jimbo Jimbo is offline
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Default Re: Why dont value investors write more covered calls?

[ QUOTE ]
But if you buy KO at $60 thinking it's worth $90, you need to write calls at $90.

[/ QUOTE ]

No you don't, you should write them short term at $65 or $70 and gain all the time and volatility premium. Reasoning is that if you thought the stock would go to $90 quickly you wouldn't have bought the stock in the first place, just the calls.

I wrote coverd calls on MSFT for a bit over two years till I sold it all recently. The calls were all short term OOTM (one month after the prior ones expired) I ended up paying for the entire position in the stock with the premiums.

Jimbo
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  #7  
Old 11-25-2007, 02:55 AM
pig4bill pig4bill is offline
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Default Re: Why dont value investors write more covered calls?

[ QUOTE ]
Seems to me that if most value investors go into a position with an idea of true intrisic value and will sell and move on when the company reaches that value, much like buffett recently did with petrochina, then they should be writing calls whenever they enter the position at the price they targeted as IV.

[/ QUOTE ]

Because people are greedy. Everyone I've asked about this says something to the effect that if they buy the stock at 50 hoping to sell at 90, they don't want to write calls at 60 or 70, or even 90, truth be told.

When I was working for a chip company, we got lots of options, ESPP, etc so I watched the stock every day and got to know it well. I would say for the 5 years I worked there and held the stock in my personal account, I probably averaged 50% a year selling covered calls.
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  #8  
Old 11-25-2007, 03:00 AM
pig4bill pig4bill is offline
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Default Re: Why dont value investors write more covered calls?

[ QUOTE ]
Buffett wrote puts on KO once when the price got low, but not low enough to buy more. And he's got billions in long dated index puts (ten years or more) that essentially force him to buy the index if the price drops 30% or so.

[/ QUOTE ]

He did the KO puts because he wanted to buy the stock cheap. He wins either way. It's an especially good technique to buy huge blocks with, because it doesn't hit the tape and drive the price up.

[ QUOTE ]
The problem with writing puts like this is tying up capital.

[/ QUOTE ]

The premium received more than compensates for the carrying costs of tying up the capital.
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  #9  
Old 11-25-2007, 10:39 AM
stephenNUTS stephenNUTS is offline
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Default Re: Why dont value investors write more covered calls?

I would probably consider myself more of a TECHNICAL trader on a shorter term basis.....and a VALUE based/FA /bargain hunter stlyed investor over a longer time frame.

I have always preferred to WRITE covered options against my positions...as I would always rather receive these premiums vs. paying insurance in most cases if I am inclined to hedge a certain position

During certain market conditions however(e.g.flat vs. extremely volatile).....there are some obvious exceptions due to the expansion/spread of premium prices

Stephen
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  #10  
Old 11-25-2007, 12:48 PM
mmctrab mmctrab is offline
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Default Re: Why dont value investors write more covered calls?

[ QUOTE ]
Just short puts. Why write covered calls? Aren't transation costs more?

[/ QUOTE ]

When you're opening a new position they are, since you're paying a commission to buy the stock and one to sell the call. But, we're talking about selling calls on stocks that you already own.
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