ASX Shares Covered Calls

HI Geoff,

They can be a great way to get some premium income from an existing portfolio in a flat market BUT you need to be willing to sell (and pay taxes) or buy back the option at a loss if you don't want to sell - it's not risk free.

There are ways to stack the odds in your favour though, through technical analysis.

 

I haven't looked into it for ages Geoff so not hte best person to ask, but Louise Bedford had a book called the secret of writing options which was good. CMC did options and wasn't too badly priced.

The TA is really easy, if you have access to a charting package I could talk you through it in a zoom call

 

I use covered call for all my shares when I see their run is peak, well based on my judgement
I can get it wrong but it has not stop me doing it for years.

I also used naked put to buy shares and also collecting the premium

I do it on continuous basis 3-5 months expiry date, it generates an extra 6-10% premium for me each year with the odd assignments here and there that I already factor it in.

I always has cash ready to backup any naked put assignment if I write 100k contract I have 100k liquid cash I can access within 2 days, be it offset or saving

I hold till expiry date and never close either I get assigned or I get free premium.

The last time I remember getting a naked put assigned was QBE at $10.50

Almost all other time it pocket free premium plus dividend.

If you know what your are doing it very neat way to collect free cash with the risk that you be up for holding or selling the parcel which you would have bought at market or sold at market anyway.

@geoffw if you got specific question you can message me, I been doing it for about a decade

I don’t trade options or play any dozen of strategies or spreads available for it. I work out my own system to generate income only

 

@PandS , would you be able to provide an example with actual numbers on writing puts and pocketing premiums. Not that I want to be a trader but to see if I could get my head round to it.Not to speculate or for a hedge but purely to generate income in relatively safer way.

 

I don't trade options, I write naked put and covered call just to get premium and I hold till expiry
you need to know your options though and work out your risk and reward

let say STW which is the ASX200 index, if you got holding in that you can write covered call or if you don't and you want to buy some but instead of buying today price say $57 I said how about I write a naked put of strike $56 expiry Sep 2020 with the premium of $3, the market isn't open so I don't know what the bid and ask price is I just use the last trade price of $3.160 on 05/06.

and let say I want to write 10 contracts of 100 shares each that 1000 shares
1000 shares x 3 premium, I pocked $3000 premium upfront (this money is your now nothing can take it back but you face the risk shares price can dropped below strike price)

if the share never trades at $56 in September I get $3000 for free, if it drops to $56 I get to buy it at
$56 x 1000 = 56K cash I got to have it ready

if it drops to $54 in by September I still have to buy at 1000 x 56 that your risk there, it can dropped below the strike price and you still have to pay strike price but you get $3000 premium compensation it similar to insurance money someone paying you.

if it drops to $20 I am @#$@#$@#$ hahaha I still have to pay 1000 x 56 but then it no different if you were to buy it today at $57 and it dropped to $20 right but you don't get the 3000 premium

not all that easy but with proper risk management, it a good play.

I wouldn't get into it if you know what you are doing you got to know your stocks and your risk tolerance and has plenty of cash to back your naked put option

 

Hi Pand$.

Tried to message you, but unable to do so. Would like to talk more about option writing.
Cheers,
K.

 

I trade options occasionally with a US account I’ve had for years. I think I’ve tried about a dozen different strategies over the years and at one point became a little obsessed. I used it as my main source of income for a few years and was rather successful (/lucky). Apologies as this doesn’t apply to Aus markets but the moral of the story is the same. I’m no financial analyst, just a regular schmo who did some research and took a punt with a margin account. I’m not versed in technical language or have any formal education in finance.

Selling put spreads worked a treat when tech stocks were booming 2016-2019 but a few black swans left me with my pants down on occasions. Iron condors where great when things were flat in previous years and a mish mash of others thrown in have worked at times.

After all the research and multi monitor graph tracking analysis pseudo science, my one and only strategy now is rather simple and generates on average 12-16% on my leveraged account. Cash on cash this is a nice earner. This on top selling monthly calls on my holdings wayyyyyyy out of the money are the only options I touch.

I sell an index fund put spread (s&p or q’s) 10% out of the money with a 90 day expiry for a decent premium then buy it back rain hail or shine after 40-60 days depending on sentiment. I do this every Monday without fail. Sometimes I pay more than I sold for but more often than not I profit. Time decay plus the intrinsic movement upwards has made this my most successful strategy over ten years. Granted my US account has zero fees, cheap interest and the volume and volatility of their markets make this a bit easier.

In short, the more complicated I got and the more I ‘could pick’ the direction of the market the less I made.

I read somewhere warren buffet makes most of his profits from selling naked puts in WTI (oil).

There are some really good beginners books that cover the basics, I’d start there. Once you get the concepts- the world is your craps table.

 

One of the main problems on the ASX is lack of liquidity and subsequent high spreads which make anything other than plane options very expensive.

The other is that learning "about" options doesn't mean you will make profits.
There still is a prediction factor or educated (or not) guess involved.

If the market goes up, sell puts.
Market goes down, sell calls.
Market flat either.

Nice!
12-16% per trade or annum?

 

Thanks Aaron and P&S. Can you tell me which brokers you use to do naked writing in Australia and the US? My old broker used to permit it but no longer does so. Thanks in advance.

 

Hi Aaron.

Many thanks for the detail reply and sharing your strategy. Quite insightful. I too have opened up an account to be able to place trades on the US market, primarily due to lack of liquidity in the asx.

I saw a youtube video of a person who does something very similar, except he does it everyday. Basically he started by entering a 60 dte every day, and closing each trade out at the 30 day mark, irrespective of the price. Like you, he losses sometimes, but most of the time he wins. Was a very interesting approach. Obv, one must have the capital to be able to enter 30 trades ( as on the 31st day, the day 1 trade is closed and a new one opened).

I do have a question about how you saw the strategy work out in Feb to May last year, when the markets fell immensely? Selling puts works really well in a bull market, but how to handle a falling market? Very interested to hear what you did during that time in the market last year.

I have looked at, read, listened to heaps of youtube videos on lots of types of option styles etc, but in the end tend to agree with you. Best to keep it simple. Being in a such a non-favourable time zone is also not helpful in implementing more complex strategies.

I am looking at doing something similar to what you are doing, just working out the working capital required. But am very interested in hearing your experience through the market downturn last year.

Thanks in advance.
Regards,
K.

BTW, that % return you have written, is that per annum, or per trade or some other metric? Am sure it can't be per annum, as it seems a extremely low for the level of risk being undertaken. That % can be achieved just with equities.

 

Hi Comrade.

There are heaps of options:

Interactive Brokers - allows you to participate in most markets in the world. Trading platform is not the most user friendly

Tastyworks - only has US markets at this stage. I love their UI, very very user friendly.

Cheers,
K.

 

I usually try and get out of the trade after 30-50% decay. So it’s 30-50 per trade target. This covers me for any losses I incur and usually averages out to a profit of 12-16% per year. Remember, taking a loss is built in to this strategy. For me it works but horses for courses.

 

I use TD Ameritrade, it’s a US account from when I lived in the states. I tried to open one for my old man who is an American citizen but lives in Aus and they wouldn’t let me. I’m afraid favorable options trading conditions for the US market May only be available through their platforms.
TD does have a great desktop app called thinkorswim, it’s an analysis tool for finding options with a bunch of filters. I found it to be very helpful when I was heavily trading. There’s a bunch of tutorials for setting up the filters which are very helpful.

 

I’ve been through a few big drops and the key is to keep selling credit spreads against your instincts. If you look at the VTI it dropped from 150 in March way down to 110 at light speed. Volatility never seen before in the S&P. I think by end of May it was back to 150. Now it’s touching 190.

It might sound strange but the downturn helped. I was able to put 90 day credit puts on all through March and April that I could buy back in 60-80 days for a profit. Yes I lost most of the positions I had open that expired in March and April but it’s built in to the equation.
The key is not to get greedy, go 10% +- out of the money on your premiums (usually around 50$ on a 1 point ($100) spread and buy it back as soon as you can at a 30-50% profit.
When the slate is settled I’ve found I make 12-16% per annum for what I consider to be a very very low risk strategy.

Maybe you can beat that with equities but not over a ten year average. The S&P moves at 8% on average a year in its life span. If you can beat that you’re considered a winner.
Yes I’ve had friends that bought Tesla at 200 before the split and have ten fold this return but I consider going in on speculative stock way more risky than these types of credit spreads. You’re using the intrinsic upward nature of the market to your advantage. It’ll always bounce back, you just need to close your eyes and jump.

 

Oh by the way these aren’t naked, they’re credit put spreads. You don’t need a truck load of equity to cover them. Do a quick google search and you’ll see the advantages. Sometimes I’ll sell naked puts but only if I actually want to buy something. Otherwise it chews up all your buying power you can use elsewhere (like credit put spreads).

 

Attached is one I prepared earlier as an example.
A 90 day credit spread for a credit of $730ish 2% out of the money. You only need $1000 capital to cover this as you’re both buying the short and selling the long at a 1 point spread. The most you can lose is $270 if you let it expire inside the money. For this to be profitable the strike price either needs to stay the same or move up. Time decay is very powerful in this position.

It looks complicated but it’s a one touch trade with my brokerage app.
I hope this helps you guys, it’s been a winner for me long term.