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 Post subject: Anyone Investing in Covered call options ?
PostPosted: Fri Mar 19, 2010 5:56 pm 

Joined: Wed Mar 17, 2010 8:36 pm
Posts: 13
Been writing "covered calls" options since last year (mainly since December 2009) and have cleared profits of a little over 8500.00 putting about 39k at risk. In and out of positions so don't always have all the money tied up. Seems to be working pretty good. Haven't taken any of the high priced seminars. Just read some books and self taught.

Anybody else out there doing the same?


Last edited by stevepierce1 on Sat Mar 20, 2010 12:59 pm, edited 3 times in total.

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 Post subject: Re: Covered call options
PostPosted: Fri Mar 19, 2010 8:34 pm 

Joined: Sat Apr 07, 2007 2:03 am
Posts: 872
Location: Taishan, Guangdong, China
What are the commissions on it?

There are several covered call ETFs. Are you doing as well compared to just using these ETFs after expenses and taxes?

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 Post subject: Re: Covered call options
PostPosted: Fri Mar 19, 2010 9:50 pm 

Joined: Wed Mar 17, 2010 8:36 pm
Posts: 13
Use Scottrade so it's more expensive than a dedicated options discount brokerage. If I continue to do this, I'll probably change. Buying stock is 7.00 no matter the # of shares. Selling 10 contracts runs 19.50.

Expenses are high but gains are much higher. Don't do ETFs but only stocks. Right now I am trading in a taxable account which is not the most effective way due to Short Term Capital Gains.

Since I'm retired, I'm going to consolidate some IRA accounts so there will be no tax consequence. Covered call writing is allowed in IRA accounts due to the reduced risk.

Just purchased 1000 shares of "ITMN" at 14.96 and sold 10 contracts of the "IQY15Mar" for 4.00/share. Made 4000.00 premium but wouldn't you know it, the stock ran to over 40.00/share. So I made 4000.00 instead of over 25,000.00. But would never have bought the stock in the first place without selling the options along with the purchase.


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 Post subject: Re: Covered call options
PostPosted: Fri Mar 19, 2010 11:06 pm 

Joined: Sun Oct 14, 2007 11:10 am
Posts: 317
First, before I forget, a covered call position does not have "reduced risk". It can be allowed in an IRA because it has defined risk. The brokerage knows exactly how much you can lose on the trade -- and that's everything you put in it. A possibility of a 100% loss hardly sounds like reduced risk to me. OK, moving on...

That was an exceptionally risky position to put on. If the FDA's review of pirfenidone, InterMune's drug for a rare lung disease, had gone against the company, the stock could -- and likely would -- have been pummeled deep into the single digits. You easily could have taken a 50% loss even after accounting for the $4 in premium collected.

Options pricing includes a component called "implied volatility". In effect, it's compensation for the likelihood that the underlying instrument (the ITMN shares, in this case) will move enough to cause the option to expire in-the-money (that's not exactly right, but it's close enough to make the point). Stocks with low stock price volatility, (for example, big blue chips like IBM, Microsoft, Exxon, WalMart, etc) will have lower options implied volatility, and therefore a lower options premium. It's not unusual for Exxon's IV to be around 20%, considered a tame value.

It follows, then, that more volatile stocks would carry higher implied volatility values. During the end of February, as the market awaited ITMN's FDA news, IV on the March options chain shot up to over 300%. Sure, this makes for a fat premium, but it also means a substantial move -- in either direction -- in the stock is anticipated. A buy-write in this case caps your profit pretty much at the options premium, and leaves you exposed to a huge price drop. The huge IV is trying to warn you that when you can collect a 27% return in about 3 weeks time, you're exposed to substantial risk. The market doesn't leave free money laying around.

Fortunately, you got away with this one. Your only loss this time was the opportunity to participate in a substantial run up in ITMN. But you could have just as easily been staring at 1000 shares of a $3 stock after that FDA announcement. It happens, particularly in the wild biotech space. Please be careful.


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 Post subject: Re: Covered call options
PostPosted: Sat Mar 20, 2010 12:05 am 

Joined: Wed Mar 17, 2010 8:36 pm
Posts: 13
You are right, this was a very risky trade and I got lucky. This is not a typical trade for me and am usually a lot more conservative and go for around 5% monthly return on a stock with good fundamentals. Thanks for the correction of using the term "reduced risk". Just trying to note that you do have some protection from a possible downturn in the stock.

I understand that a stock can fall like a rock before you can get out in some of the more volitile stocks. Since I am retired, I have more time to watch the position rather than just waiting for expiration.

TIVO was purchased in December for 9.90 and stayed around 10.00 until just recently. Got in and out of the options several times and cleared over 3,000.00 after expenses before being called away today. Called away at 10.00 and closed today just under 16.00/share. Again I would have made over 6000.00 just holding the stock but am satisfied with almost 40% return for 3 months. As stated before, I would not have been in the stock if not for being able to sell the options.

I am having fun with money I can afford to put at risk. I just got tired of buying stock, sitting on it, and hoping it would go up. Would never "day trade" as I feel that would be a sure loser.


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Mon Mar 22, 2010 10:39 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5398
I've played around with buying calls and selling puts. So far after about 2 years I am down about $800. I've stuck almost exclusively to index options (options on SPY, EFA, and RUT) that are at or near the money. Essentially I am betting on short term moves. I've had a few big wins (invest $350 and gained $2800+ in a couple of weeks) but mostly I have either gotten out with a ~$100 loss after a week or two or have stayed in and lost the entire position.

Obviously in percentage terms these are big amounts but in $ terms my $800 loss over two years is minor and has provided me a very good education on how options really work.

I would stringly advise anyone who does not understand options to stay far away from them. I am no expert but have taken and taught several classes on options and valuation theory. I know what I am buying, just have not gotten good at it yet.

I would classify options speculation as nothing more than making bets on news events. For example, I sold puts on EFA a couple of weeks ago to bet on the deal to bail out Greece falling apart. My options expired Friday...the deal seems to have fallen apart today. I lost a whopping $350 on that.

What you are doing, writing covered calls, is something I have considered but I do not keep my index investments in the same account as my options so I am in the situation where my cover is invisible so the calls are flagged as high risk.

I use OptionsExpress and am neutral regarding them. Their interface and prices seem ok but not outstanding. But they keep calling me trying to sell me seminars which is extremely annoying.


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 Post subject: Re: Covered call options
PostPosted: Mon Mar 22, 2010 10:44 am 
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stevepierce1 wrote:
Since I am retired, I have more time to watch the position rather than just waiting for expiration.


That's been one of my problems. I don't have time to watch the market all day and have been reluctant to trade frequently so I tend to take positions and then wait until just before expiration to close the position.


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Mon Mar 22, 2010 6:26 pm 

Joined: Wed Mar 17, 2010 8:36 pm
Posts: 13
Writing naked calls and puts is too risky for me.

Had 800 shares of Walmart last year and sold options against them a few times. The wife worked there and had accumulated the stock. Finally just sold the stock since it was never called away. Used the proceeds to buy several lower priced stocks and immediately sold options against them. Have done pretty good but have a couple of stocks that are down and have no options against them right now. Could offset the loss against substantial profits, but have trouble selling a stock at a loss.

For those that may not know how this works, it's not really that difficult. If I can do it ...

If you have stock sitting in your portfolio gathering dust, you can put them to work. For example, say you have 1000 shares of a stock currently at 14.53. You can sell someone the right to buy that stock at 15.00 (someone is expecting the stock to go up) for a premium of 4.60/share with the option expiring in 23 days.. You bring 4600.00 into your account. If the stock goes above 15.00 you are obligated to sell the stock at 15.00 plus get to keep the 4600.00 premium. If the stock stays below 15.00 at expiration, you keep the 4600.00 plus still have the stock to do it again next month.

A nice way to make a monthly return rather than just holding the stock and hoping it will go up. You could sell the option at 14, 20, or 25.00 depending on whether you wanted to hang onto the stock or don't care if you have to sell the stock at expiration.

I get free recommendations at callpix.com. Anybody have any other sites with option trade ideas.

Steve


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Mon Mar 22, 2010 10:14 pm 

Joined: Tue Jun 03, 2008 8:30 pm
Posts: 158
I would never buy or sell options on tips, just like I would never buy or sell stocks on tips.

I'll probably start writing some covered calls soon, once I get approval from Zecco.


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Mon Mar 22, 2010 10:34 pm 

Joined: Wed Mar 17, 2010 8:36 pm
Posts: 13
I wouldn't either. Callpix searches the universe of available calls by return on "in and out of the money calls", lists them, and you research from there. Just looking for similar sites.

Steve


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Tue Mar 23, 2010 6:14 am 

Joined: Tue Sep 23, 2008 6:05 am
Posts: 329
Great thread. I don't have a problem with options trading per se, especially with reasonable covered calls during certain situations.

However, the tricky part isn't so much how to do it, but rather, what to do and when? What do you buy and when do you buy it? How reliable are your sources in making those trades? Are you truly able to consistently out-pace passive market index funds in this way?

Let me re-emphasize that I don't have a problem with this, and that I too am learning to do so myself. I also made a boat-load from shorting the oil bubble back in 2008.

The bottom line is, it's simple to learn, but it's difficult to master. Most retail investors are still going to get rocked by this form of active trading. That said, I also think you are approaching this rather sensibly, Steve.

Just the same, I think most investors can do just as well, with next to no effort, by simply buying and holding passive, low cost index funds.


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Wed Mar 24, 2010 4:50 am 
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Joined: Wed Aug 20, 2008 4:12 am
Posts: 38
I'm glad to see options being discussed on JD's forum! I've gotten into options over the past year and was surprised to find that they weren't as risky as what I assumed. My favorite strategy is still the cash-secured put, even though I haven't put it into play in the real world yet.

I work for http://www.onn.tv and that's mainly why I started learning about options—the whole site is devoted to options news and trading ideas. And the book that helped me nail the basics down was Michael Sincere's Understanding Options.

Does anyone else have any good beginner books or sites they like?

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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Wed Mar 24, 2010 8:37 pm 

Joined: Wed Mar 17, 2010 8:36 pm
Posts: 13
Thanks for the book tip - I'll check it out.

A couple of books that I've found helpful:

"Covered Calls and Leaps --- A Wealth Option" by Joseph Hooper and Aaron Zalewski
"New Insights on Covered Call Writing" by Lehman McMillan
"Exit Strategies for Covered Call Writing" by Alan Ellman

You can read the reviews on Amazon.

As you can see, I concentrate on "covered calls". For the last 4 months, I've averaged over 6.5% per month return on a 39k account. I don't expect to keep that pace but a 78% yearly return would be great. I know, you don't count your money while you are still in the poker game but I have to tell somebody. Better than CD rates.

What is a "cash-secured put" ?


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Wed Mar 24, 2010 11:32 pm 

Joined: Sun Oct 14, 2007 11:10 am
Posts: 317
stevepierce1 wrote:
Writing naked calls and puts is too risky for me.
This is a common misconception. A short put and a covered call have the exact same risk profile. They are synthetically equivalent.

Quote:
...say you have 1000 shares of a stock currently at 14.53. You can sell someone the right to buy that stock at 15.00 ... for a premium of 4.60/share with the option expiring in 23 days.. You bring 4600.00 into your account.

This would be an exceedingly rare situation, and it's one I've already touched on earlier. It's not a matter of if you'll get burned on big percentage premiums like that, it's when.

ekrabs wrote:
However, the tricky part isn't so much how to do it, but rather, what to do and when? What do you buy and when do you buy it?
Ahh, well, there's the rub :) Options trading isn't for most users -- in fact, individual stocks isn't for everyone, for that matter (as you point out). But if you insist on holding individual issues and don't mind having them taken away, writing calls against them can generate income from an otherwise stagnant position. You can also use short puts to enter a new position at a discount to today's price, later selling calls on the shares once the puts are assigned (if that ever happens). Rinse and repeat. As an example, a stock that's been meandering like Microsoft has of late might have made a decent candidate for that type entry and/or exit.
stevepierce1 wrote:
What is a "cash-secured put" ?
A cash-secured put is a naked short put that is backed by the full amount of the settlement in cash, as opposed to the normal ~20% margin deposit required. Instead of posting $600 for a short 30 put, you keep the full $3000 in cash in the account for the full duration of the trade. Cash-secured is the only way to write puts in an IRA (if your broker is enlightened enough to allow it at all).


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 Post subject: Re: Anyone Investing in Covered call options ?
PostPosted: Thu Mar 25, 2010 4:40 am 
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Joined: Wed Aug 20, 2008 4:12 am
Posts: 38
NoBob pretty much hit the nail on the head there. I find it a lot easier to visualize with a chart:

http://http://www.onn.tv/glossary/cash-secured-put/.

I'm a visual guy so seeing all the trades and strategies makes a lot more sense when I put their charts side by side like this.

@StevePierce: sounds like you are off to a great start!

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