Trading Covered Call Options

Hey all,

Just wanted to see if anyone has experience with Covered Call options? I have been reading about it for some time now and I am interesting in trying it out. So before I do I wanted to see if anyone can shed some light on their experience with it?

I understand that buying stocks for sole purpose of chasing a premium is silly. I would do it on my current portfolio of blue chip shares which I plan on holding for long time. I would be happy with premium of 1% a month. If my shares get called I would just go back to market and buy them back and repeat the process.

So please share your experience with them.

Cheers

 

Do a search on the SS forums. A few people there have some stories that are good reading.

I decided I don't have the capital and experience to give it a go yet.

 

It can work really well in a flat to downtrending market, but if it's rising you're probably better off just letting your profits run.

 

Thanks for suggestions. I plan on doing it on a monthly basis on blue chip companies so if there is a move it should not be huge. I'm happy to sacrifice that move to capture premium and small profit on the share if it gets exercised. I would be happy with that consistency. I would simply buy the shares back if they get exercised as I intend on keeping those for long time. I would not trade on earnings reports nor 45 days before dividend payments.
Thanks for suggestion Hodor - reading it all at the moment.

 

a few spruikers used to make good money teaching mum and dad investors how to write covered calls. I note that these spruikers don't seem to be spruiking this strategy much anymore.

 

You won't get rich or give up your day job.

If you have an existing and large-ish portfolio of option-able shares you can enhance the income somewhat by selling some OTM calls, at the right time.

But you must have a system and stick to it. Can't believe I said that, like I stick to a system when the market is down 3.8%.

I've been doing on and off and in a few variations for years, I suspect I'm about where I started by now, buy and hold would have worked better but it kept me entertained. Why? Not following a good system and a $hitload of bad luck. Some may say there is no bad luck in the share market, only bad systems.

But being positive for a moment, the "buy-write" system has more appeal. Covered calls systems (like sold by the above mentioned spruikers) talk of monthly income by collection premium, (or brokerage from their point of view). Buy write ATM is trading with options and allows for a known maximum income with some downside protection. As for that downside, normal stop losses apply (like I follow them either).

 

Yeah I know spruikers were flogging this like crazy. I didn't agree with few things they did though. They were suggesting to leverage yourself to eyeballs and to write calls purely for the premium. It didn't matter what the stock was or what it was doing in the market as long as you were getting 4-5% premium per month.

I intend to do this on stocks that I hold for income. The stocks that I will hopefully leave to my grandchildren. So this is why i'm interested to generate extra income. I intend to write it only on 3 stocks and will not chase any other just to get the premium.

I don't intend t quit my day job. Even if I become a billionaire I wouldn't quit my day job, I enjoy it too much. I know that investing is not get rich quick scheme. All i'm looking is to generate extra 6%/pa on my portfolio (anything more would be greedy) with the help of options. I learned very quickly from my trading in early years that greed is BAD.

 

I've been writing covered calls for a long time. A problem is when a stock takes off or a takeover is announced you lose the shares, this has happened to me many times. Also in a depressed market like at the moment its usually not worth the risk of writing calls since you'll miss out on any recovery.

 

hey mate, would you care to elaborate a bit on your history with them. I'm aware that I have the potential to miss the upside and shares might be called. However the moment they get called I intend to buy them back.

Would love to hear more on what you learned from your experience. What to look out for and what to be mindful of? My strategy would be to write it on 3 blue chip shares only and not when earning are out and not when dividends get paid. So I would be doing maybe 3-4 trades per year per stock. all together around 10-12 trades a year.

If you have been doing it for long time you would have to be making nice income from it otherwise no point in doing it?

 

There are several problems that emerge with a strategy of writing calls that interfere with a strategy of doing it on a regular basis. In a descending market like we have seen in the last six months you don't want to write calls on stocks in case of recovery, so I haven't for over 4 months now. If you have a historical average entry price on BHP of $26 you don't want to sell them at a current strike price of $22 (what if RIO made a takeover offer at $34... you've stuffed.). I had TOL shares and regularly wrote options on them... then last February a takeover was accepted at 50% premium.. dwarfing my piffly 2% options income 3 times a year. This has happened to me at least 20 times where a share has rapidly taken off or been taken over and I have had to sell. Honestly with some shares I would have been better off not writing options, but sometimes what appears to be an easy $800 now and again is hard to resist. Usually it works out, but often doesn't and you're left with either losing the shares, closing the option at a loss, or holding dropping shares since they are locked into the contract. The idea of "immediately buying them back" does not always work since the price could now be well above the strike that you sold at.

So anyway, its interesting and sometimes fun, and relatively safe (selling calls normally reduces the risk of a portfolio), but the market sometimes does unexpected things that play havoc with strategies.

 

You've hit the nail on the head with that post, well covered. Covered Calls are OK to add a little income for an existing holding, but as a stand along system it doesn't stack up.

As I mentioned before, a ATM or even ITM buy-write is a trade with the view of not having any gain from the shares and just the time value income. For example right now IV and premium is high (for good reason), so if you think BHP has not much further to go down at $22.19, buy the shares and sell Nov 22 calls at $1.47. best case you make $1.28 per share, break-even at $20.72. Or say Nov 21 calls at $2.13. Best case you make 94c per share, break-even $20.06. Not a buy and hold system, not without risk but better chance a good yield than just buy and hold.

Here is my calculator results for BHP today:

Code Last$ Month Strike GS% Prem$ Div$ B/E$ GY$ GY% DRTL%
BHPL59 22.19 NOV 20.00 -9.8 2.84 19.35 0.65 3.8 12.8
BHPK89 22.19 NOV 20.50 -7.6 2.45 19.74 0.76 4.2 11.0
BHPJP9 22.19 NOV 21.00 -5.3 2.13 20.06 0.94 5.0 9.6
BHPGS9 22.19 NOV 21.50 -3.1 1.80 20.39 1.11 5.6 8.1
BHPYG8 22.19 NOV 22.00 -0.8 1.47 20.72 1.28 6.2 6.6
BHPXG8 22.19 NOV 22.50 1.4 1.20 20.99 1.51 7.1 5.4
BHPWE8 22.19 NOV 23.00 3.7 0.96 21.23 1.77 8.0 4.3
BHPVP8 22.19 NOV 23.50 5.9 0.75 21.43 2.07 9.1 3.4
BHPR78 22.19 NOV 24.00 8.2 0.58 21.61 2.39 10.2 2.6
BHPPW8 22.19 NOV 25.00 12.7 0.33 21.86 3.15 12.7 1.5
BHPC88 22.19 NOV 25.50 14.9 0.24 21.94 3.56 14.1 1.1

DRTL = drop require to loss
GS=Gross Sale
GY=Gross Yield

 

Thanks for that info guys. I am aware of the pitfalls and lost opportunity. I'am very conservative investor. As I mentioned it would be on only 3 blue chip shares. I wouldnt expect anyone to make a play for them as all three are market leaders. But, never say never.

I would put at risk only about 20% of my portfolio doing this. And when I say risk, the only risk I have is the lost opportunity. I would not be chasing high premiums.

@TwoDogs do you mind me asking where did you get your calculator? Is that something you made yourself in excel?

Cheers

 

Made myself, it screen scraps Etrade web page and does various calculations on the options. I also save and archive the data to back test ideas later on. Software is a constant WIP and breaks easily as web pages changed. It's not so hard to copy and past an options table from Etrade etc into a text file, clean up a little and then into Excel. I'm not so good with Excel but I'm sure it can read a source file and supply similar results.

I also do synthetic covered calls. This is where the options are covered by something other than the matching share (using DITM long dated calls or warrants). Technically naked calls so you can't get exercised, but I've yet to work out a good system for this. Also I'm playing with index covered calls/buy-write. This can be done with DITM long dated XJO options (say June 2016 4700) and selling OTM same month index calls (say Oct 5300). I'm also doing this every month in my SMSF but instead of long dated calls for the cover, I'm using STW shares that the fund already owns. No system is finished and not by any means fully safe.