Trading Covered Call Information

Covered calls are something I have thought about for a while and would like to investigate if part of my strategy can work around using them.

I only have a basic understanding of the process but would like to know if anyone have some good resources on the topic so I can work out if the numbers stack up for me.

Thanks

 

Covered calls work great in a sideways or downtrending market but in a bull market you're best off just holding the shares.

Louise Bedford has a book on it called the Secret of Writing Options which is a good place to start, easy to read.

 

Thanks.

I'm looking to potentially use covered calls to increase returns when I think the returns will be flat at best. I am not interested in selling as I plan to hold for the long term, I realise I could be called and have the upside limited.

I want to look at how much income it can produce, trading costs, etc to work out if it is viable and at what point. For me with Commsec it isn't currently due to my relatively small portfolio.

Does anyone here currently use covered calls regularly? What are your experiences? I read somewhere that the Aussie market isn't nearly as good as US for writing options, I have no idea if this is correct.

 

It is. There's only a few blue chips in Australia that are liquid enough to know you can get out at a decent price.

I used to use CMC markets but haven't traded options for ages now.

 

Some PC discussion here

The Louise Beford book is an excellent start. If you are researching then always try and ensure what you are reading relates to the Australian market as the US is so much bigger and more liquid that most systems spoken of just don't work here. You can easily do US options by using Options Express of course, that's another story.

Australian options brokers are steam powered compared to US. Expensive, hard to get quotes, horrible spreads, no linked orders or stops. Commsec is quite easy going with a level 4 account and allows fully naked calls and puts, to a point anyhow. Even if you don't want naked options, the flexibility is useful when establishing a position. They also allow covered calls over margin loan held shares, but with silly fees.

Looking to increase return on existing holdings using covered calls just doesn't work IMHO, unless you hold several thousand shares of optionable stock. This is also the line taken my some brokers to try and get turn over. Selling options with no love for the shares underneath is the only way to approach covered calls.

In my SMSF I sell small lots of cash covered puts, if exercised then sell ATM calls, happy to be exercised or hold the shares. The brokerage as a ratio to income can be a killer when doing small lots.

Just Google "buy write" to get some ideas on these methods.

Here are some links of other ideas you may find helpful, some OZ, some US

Retirement Strategies to Retire Early - Low Risk Income Strategies (Australian, bit odd but very interesting)

Covered Call Trading Vs. Buy-Write Trading Part 1

http://www.andysrant.com/2012/03/ho...ays-trading-xjo-options-over-the-stw-etf.html (this system described is not correct and does not work using the numbers suggested, but the concept is great)

Advanced income strategy – the leveraged covered call

 

Used to do it years ago, but you need to own the stocks outright, IMO, not margin, especially if you want to also buy a long-dated put as "insurance" when on margin. I found that by the time I bought the shares, bought the puts, paid interest and brokerage on both the share purchase and the call write, and possibly was called once or twice during the year, with the extra costs that entails, I ended up even IF I WAS LUCKY! I was using a full-service broker (who did usually get me a good premium) so option brokerage was about $45 from memory, but share purchases were $75 or 1%. Buying 1000 NWS @ $30 was costing me $300 in brokerage!

This was around 2001 (higher interest rate that today, I'm pretty sure), and the minimum option parcel was still 1000; now that it's 100, I still reckon that you need to trade 10+ parcels to make it worthwhile after the brokerage. Of course it depends on the underlying to some extent too. The other factor is that you get better premium on a more volatile underlying, but this also introduces more risk of exercise.

If you can see the share price dropping in the short term, then perhaps slightly ITM will be a better option (pun intended) than slightly OTM. In this case, a written call can bring in a little bit to cover the share price drop.

It is also quite an active strategy; eg, you need to be clear well prior to on expiry day what your plan is, if you're ITM. You need to decide whether you willing to be called (keeping in mind any CGT considerations on the underlying) or whether you will buy back the options to cover yourself; even sometimes at a higher price that your original income. I found dithering around on the day to be quite stressful. At the time, I was often travelling for work, and in client premises, training or consulting, and not being immediately available to the broker was a problem.

Some of these issues will no longer exist, now that the online trading platforms allow you to do so much more, but I've found that E*Trade, for one, isn't set up well for writing transactions. Maybe it's my account set up.

Anyway, that's my two cents. I found it ended up being more trouble than it was worth at that time, and while I believe there is merit in the strategy, I haven't revisited for a while. If I was to do it again, I would want parcels of at least 2000 shares, I would prefer to own them (not margin), and if owned I wouldn't bother buying the long dated puts.

Check out the "Magic Moo Cow" strategy. Spanny even had a listed fund that was doing this, but it went broke. This tells me that it's NOT a strategy that works all the time.

 

Ahhh brings back memory. Looking back, now I know who was being milked.

 

Excellent info. Thanks.

It's clear from my reading now that this isn't something that's going to work for me with my situation. I might revist the idea one day. But for now I can clear my mind of this idea and move forwards with what will work, ETFs and LICs.

 

Revitalising this old thread. If the underlying stock is owned, for a little bit of spare cash sell a covered call position a bit out of the money but not too far away time wise.
As an example - CBA. Let's say 1,000 units are owned (currently under $80), sell the 31st oct $82's and bank $100 (after costs, assuming you can get 15c each).
Relatively low risk that this would be exercised with the short time frame.
If you really wanted to hold the stock, wait for a dip, then re-buy.