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Author: hastings4455 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19414  
Subject: Options income Date: 7/27/2001 8:55 AM
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My father's portfolio is loaded with utility stocks and he's uncomfortable with the volatility that sector has experienced recently. He can't sell long-term holdings, because of the capital gains taxes he'd have to pay, but I'd like to help him smooth out some of that volatility in his retirement years.
I would appreciate hearing from Fools who can direct me to information about a relatively conservative strategy of selling covered calls on specific stocks, or uncovered calls on the Utility Index. When attempting to generate income while protecting gains, is it better to sell out of the money calls, deep in the money calls or a blend?
Thanks
Hastings
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Author: buy2win Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7193 of 19414
Subject: Re: Options income Date: 7/27/2001 11:37 AM
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I would appreciate hearing from Fools who can direct me to information about a relatively conservative strategy of selling covered calls on specific stocks, or uncovered calls on the Utility Index. When attempting to generate income while protecting gains, is it better to sell out of the money calls, deep in the money calls or a blend?

I've got news for you, friend, selling uncovered calls is not a relatively conservative strategy. That's one way to get rid of your father's capital, though, if that's your intent.

Selling deep in the money calls is guaranteed to call away the stock, and since you don't want to sell the stock, I wouldn't use that strategy. Likewise, at the money calls risks losing the stock. Out of the money calls on utilities might not produce much income at all. So, basically, I'd say forget about using an options selling strategy.


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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7195 of 19414
Subject: Re: Options income Date: 7/27/2001 8:15 PM
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My father's portfolio is loaded with utility stocks and he's uncomfortable with the volatility that sector has experienced recently.
He can't sell long-term holdings, because of the capital gains taxes he'd have to pay, but I'd like to help him smooth out some of
that volatility in his retirement years.
I would appreciate hearing from Fools who can direct me to information about a relatively conservative strategy of selling
covered calls on specific stocks, or uncovered calls on the Utility Index. When attempting to generate income while protecting
gains, is it better to sell out of the money calls, deep in the money calls or a blend?
Thanks


I think selling covered calls is a good way to sell the stock off over time. I would us an experience broker from a big name firm. Maybe after a few trades you can do it through a discount broker, but pay the extra commission as your learning fee.

I can tell you from experience that holding a stock to avoid taxes can cost you a lot more than the tax. In fact I bet if your father would have sold a couple of years ago he would be ahead even after the taxes.

The point is do not let taxes prevent you from making good investment decisions.

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7196 of 19414
Subject: Re: Options income Date: 7/28/2001 3:00 AM
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<He can't sell long-term holdings, because of the capital gains taxes he'd have to pay>

<<I can tell you from experience that holding a stock to avoid taxes can cost you a lot more than the tax. In fact I bet if your father would have sold a couple of years ago he would be ahead even after the taxes...The point is do not let taxes prevent you from making good investment decisions>>


I would have to agree with RJM1. In fact I would take it one step further. The CG taxes should never be the ONLY reason for holding onto a stock. While you are worrying about the tax bill your gains could easily disappear. Unless one has been unconscious over the last year they would see countless examples of just that happening.

You should have good records of the cost basis on every holding. That may help you decide which ones to sell, although each stock should be evaluated independently of the gain status. Having a portfolio loaded with utility stocks is an extreemly dangerous situation to be in. Is PG&E one of them? Those who blindly held that one not only lost their gains, but their dividend income too. Probably the easiest question one should ask themselves is if they were starting from scratch would they buy all of the stocks in the portfolio?


BRG




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Author: hastings4455 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7197 of 19414
Subject: Re: Options income Date: 7/28/2001 5:22 PM
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My idea re: deep in the money calls would be to sell them on the Utility Index, not individual stocks. If the index rose, he would have to pay the difference above the strike price (from a MMF, not by selling stocks and incurring a capital gains tax), but this "loss" would be offset by the rise in the price of his stocks -- while the option premium would still provide some income. If the index fell (along with his stocks), losses would be protected to the extent of the deep strike price. Reaction?
hastings

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Author: covan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7200 of 19414
Subject: Re: Options income Date: 7/30/2001 10:44 PM
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Hi Hastings,

You wrote "He can't sell long-term holdings, because of the capital gains taxes he'd have to pay,

Why can't he sell them? The long term rate is only 20%, and the tax only applies to the difference between his basis and the sale price.

Remember that call options are short term investments, and any income from them would be taxed as regular income. Also, if he sold a covered call and it was exercised, he'd still have to deliver the stock and pay the capital gains tax. A deep in-the-money call call on a typical utility stock is almost sure to be exercised, but it might be a way to put the gain off until next year, if that is what he needs to do. An out-of-the money call may or may not be exercised, but it typically won't carry as much premium, and he will pay tax on that at the regular income rate. Finally, I think uncovered calls on anything are a bad bet, and too risky for someone who I take it is retired, or about to be.

Fred

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Author: JoelKrug Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7285 of 19414
Subject: Re: Options income Date: 8/17/2001 2:28 PM
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It is quite possible to add a significant amount to your annual return by selling
out of the money covered calls.  The table below gives some numbers which may
be useful.  By way of explanation:  the 1st column is the amount (%) by which the
Call strike price exceeds the market price of the underlying stock.  The 2nd
column is the duration of the option, from time of purchase (in days);  the
remaining columns are the ANNUALIZED returns (as % of the underlying stock price)
for various level of stock volatility.  These assume, of course, that the option
is not exercised. (I've subtracted $0.10 per share for RT commissions and fees.)

Bottom line:  it is quite possible to make 10% to 20% (or more) by selling
out-of-the-money covered calls.  The risk is losing some upside profit potential
(and you may have to sell the stock before you would otherwise do so).


.                                   TOTAL ANNUALIZED RETURN          
% Out of    Option      ……………………………………………………… volatility………………………………………
money      Duration     Low (0.3)     Med (0.4)      Med (0.5)       High (0.6)
 10%         30 days       6.0%           16.6%          30.4%           46.9%
 10%         60 days       10.2%          19.7%           30.8%           43.1%
 10%         90 days       11.3%          19.6%           28.8%           38.6%
 10%       120 days       11.6%          18.9%           26.8%           35.1%
 10%       180 days       11.5%          17.5%           23.7%           30.1%
 10%       270 days       10.9%          15.6%           20.5%           25.3%
 10%       365 days       10.2%          14.2%          18.1%           22.0%
 15%        30 days       0.4%           6.5%           16.0%           28.3%
 15%        60 days       4.6%          11.9%           21.1%           31.8%
 15%        90 days       6.5%          13.6%           21.8%           30.9%
 15%       120 days        7.5%          14.1%           21.4%           29.3%
 15%       180 days        8.4%          14.0%           20.1%           26.3%
 15%       270 days        8.6%          13.3%           18.1%           23.0%
 15%       365 days        8.5%          12.5%           16.5%           20.4%
 20%        30 days        -1.6%          1.6%           7.7%           16.6%
 20%        60 days         1.6%          6.9%          14.3%           23.4%
 20%        90 days         3.5%          9.2%          16.4%           24.6%
 20%       120 days        4.7%          10.3%           17.0%           24.4%
 20%       180 days        6.0%          11.2%           16.9%           23.0%
 20%       270 days        6.8%          11.3%          16.0%           20.8%
 20%       365 days        7.0%          10.9%          14.9%           18.9%
 25%        30 days        -2.2%          -0.7%         3.0%             9.3%
 25%        60 days         0.1%           3.7%          9.4%           17.1%
 25%        90 days         1.7%           6.1%          12.2%          19.5%
 25%       120 days        2.8%            7.5%          13.5%          20.3%
 25%       180 days        4.2%             8.9%          14.3%          20.1%
 25%       270 days        5.3%             9.5%          14.1%          18.9%
 25%       365 days        5.8%            9.6%          13.5%           17.5%


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Author: buy2win Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7288 of 19414
Subject: Re: Options income Date: 8/17/2001 3:54 PM
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Bottom line: it is quite possible to make 10% to 20% (or more) by selling
out-of-the-money covered calls. The risk is losing some upside profit potential
(and you may have to sell the stock before you would otherwise do so).


Joel,

Are there any on-line services that will screen for stocks/options that produce an annualized returns of, say >20%, for any covered call during trading hours ?

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Author: JoelKrug Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7300 of 19414
Subject: Re: Options income Date: 8/19/2001 2:35 PM
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I suspect that there are dozens of subscrition services that will do something like this for you. Unfortunately, I don't use any and can't give you much more info than a web search would provide. (I've programmed my own spreadsheet with a Black-Scholes model and maintain info on a changing couple of dozen stocks for myself. Obviously, I'm really only a dabbler in options -- with "play money" -- and far from being a pro.) I HAVE looked at various on-line options tutorials, however -- and there's TONS of good material out there, if this is what you need. There are also free sources of data on volatility, and free options calculators.

That said, I just did a quick Alta Vista search, and here are a few (out of hundreds) of sites of potential interest. (No recommendations implied, since I've done little more than glance at some of these!)

http://www.coveredcalls.com/ (This site gives list of "best" 30- 60- 90-day covered calls - perhaps what you're looking for, albeit limited.)

http://www.wallstreetcity.com/optioncenter/home.asp

http://quote.cboe.com/QuoteTable.htm (Chicago Board of Options - this is the quote page; the site has good tutorial info, as I recall from the past.)

http://home.att.net/~joeandgene/GettingStarted.htm (Just some folks' home page, I guess - at a quick glance it looks sensible.)

http://www.allinthemoney.com/ (Subscription)

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Author: buy2win Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7307 of 19414
Subject: Re: Options income Date: 8/22/2001 6:36 PM
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I'm glad I stumbled on this thread from a few days ago. I want to thank you, JoelKrug, for being a good guy with your response of several excellent links to covered call information. You could have written me off as a lazy person who was unwilling to do his own research, but instead you took the time to provide me and other interested readers with this info.

You deserve 1000 recs and you ARE one of my favorite fools !



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