Advice when selling covered calls, in or out of the money?

[thwang99]

Hi all,

For those of you who try to generate income from covered calls, do you sell in the money or out of the money calls?

I've recently started setting aside some funds to try this, with a goal of generating a return of 20-40% per year. I try and find stocks where selling the covered calls generates 10-15% in 2-4 months. When doing this, what should I look for?

Should I only sell to open in the money or out of the money calls? In the money has the benefit of providing some slight cushion in case the stock falls. Out of the money has the potential for some small capital gains if the stock rises in price.

Anyways, hopefully someone out there uses covered calls as part of their strategy and can help me out here! [img]/images/graemlins/smile.gif[/img] Thx in advance.

- Tony

[RocketManJames]

Sure sounds like you're going to be selling calls on stocks with HIGH volatility. To achieve the 20-40% per year you are after, you'll need high volatility.

Also, I think what you're planning on doing is high risk. If you are purchasing a stock only because you want to sell the calls, then you're really putting a lot at risk. If you've already got larger holdings and you're trying to enhance overall yield, then covered calls, imo, is a viable option.

As for the option parameters you're looking for... I can't really help much there.

-RMJ

[goodedesign]

[RocketManJames]

[ QUOTE ]
i did a trade like this on HOV 2/26... I bought 1000 HOV for 74.5, waited til 3/8 when HOV was at 90.22 and sold the feb 75.00 calls X10 for 15.20 (15,200) selling for 75 what i bought for 74.50, with a 20% return UP FRONT for the MONTH.

and my goal was 5%/month...

[/ QUOTE ]

Maybe I misunderstood what you wrote... but how does that make any sense? You bought a stock at 74.50... good stock pick, it runs up to 90.22. Why would you bother selling the Feb 75 calls for 15.20? Why not just dump the stock? How are you any better off selling the options? What is the point of selling options that have no time value? The intrinsic value of the option is basically 100% of its worth at that point due to it being so deep in the money.

Also, what would you do if the stock hadn't run to 90+? What if it had fallen to 65?

And, it doesn't take a Rocket Man like me to know that 5% monthly return is not achievable over long stretches of time.

-RMJ

[goodedesign]

[RocketManJames]

You missed my point...

If you buy stock at 74.50, and it runs to 90.22. Why would selling covered calls for 15.20 be *better* than simply selling the stock?

Ever notice that volume on deep in the money calls is usually pretty small? Is that because it makes more sense to simply sell the stock, since the call no longer has any time premium? Deep in the money options, from what I've seen is used as a way to obtain greater leverage than margin would normally allow, but that's on the long side, and not something I recommend.

You say that you've ensured profit? No, you haven't. Selling the stock, you'd have profited (excluding commissions and fees) 15.22/share. Selling the calls, you've "locked" yourself to 15.20/share (excluding commissions and fees)... BUT, you haven't ensured anything 100%. If the market were to melt down, and the stock plummets, you could still lose money. What's more is you have ZERO reward compared to simply selling the stock. If the stock went to 400 you'd profit the same in both scenarios. If the stock went to zero... you've ensured precisely nothing with selling deep in the money covered calls, but with sold stock, there would be no effect on your profitable trade.

Ok, now tell me again...

Why is selling the call for $15.20 better than simply dumping the stock?

I never claimed to be an expert on this, and in fact, I learn something new each day. But, I really hope that those who are less in the know don't follow your strategy blindly, because you're NOT making 3% per month compounded over any real stretch of time.

And, if you sat next to Buffet, he'd probably break wind in your direction.

-RMJ

[goodedesign]

[RocketManJames]

[ QUOTE ]
benefit: you have choices when you sell the option... the money comes into your account immediately... yet you still OWN the stock... if the price of the stock falls, you can buy back those options, and then resell them for a profit again in the future... thus, effectively PRINTING money out of the stock.

[/ QUOTE ]

Uhhh...

First off, the only reason you were able to book such a "large" gain from selling the option is because the stock ran up over $15 from your purchase price.

Now, you say that if the stock drops you can buy back the options and do it again. If you sold the stock, you'd simply buy the stock back if it dropped. And, if the stock dropped, you'd be buying back the options with a time premium now attached to it (for those who are new to options, an option's time value is larger when it is near or at the money than when it is deep in the money). So, effectively, you've done WORSE than simply selling the stock. Not to mention higher transaction fees.

A big problem is that you're doing all this hand-waving about how you made so much from selling calls, but really... where did that profit come from? It wasn't from the calls... it was from a stock that ran up over $15 for you.

You have a serious lack of understanding. And, I can't wait until you get a few blind followers who are awestruck by your market prowess. Because, then you'll have set them up perfectly to sell the "Goode system" -- 3% monthly returns -- If you're not satisfied, don't worry, you'll have a 30-day risk free money back guarantee.

-RMJ

[DesertCat]

[ QUOTE ]
you ought to here the techniques i use that buffet does...

[/ QUOTE ]

It's amazing how stock market charlatans like to throw around Buffett's name to give their silly ideas the patina of authenticity, even when they run directly counter to every piece of advice Buffett has ever given. Goodedesign is trying to make money off of 2+2ers by selling a "trading system", when Buffett has consistently advised that trading is bad, will hurt your results and is the road to ruin for small investors. Hmm, who would you believe? A guy who draws logos (probably in crayon), or the most successful investor of all time? One clue, Mr. logo doesn't even know how to spell "Buffett".

[goodedesign]