I am thinking about covered calls as a conservative way to play the market. I am retired and looking for some protection with some appreciation. Does anyone have have any experience with covered calls that they can share with me. Steve!!!
I too have considered these as a means of supplementing income.But there is a major trade-off...the risk that you will lose any appreciation in the stock's price. This risk raises the question: can you predict the direction of the stock's price over the call period. Well, who do you think is on the buy side of the call you've written? Tyically, these buyers are pros who comb the newly sold options, looking for unsophisticated investors selling options into unfavorable (to the seller) markets. This certainly doesn't mean that the stock price will necessarily rise to the call price...only that the odds are working against you.I suggest you leave options trading to those who do it all the time.BruceM
I too have considered these as a means of supplementing income.i do a lot of covered calls .But there is a major trade-off...the risk that you will lose any appreciation in the stock's price. the risk is that you lose some of the appreciation --essentially four possibilities:Stock goes down --you make a couple bucks on the option and you have a stock maybe you would've wanted to sellStock stays same (or goes up ,but doesn't get to strike price) --you get the option money and the appreciationStock goes up beyond strike -- IMO, worst case becuase you have to make a decision: either buy back the option ..losing some (maybe most) of the appreciationor let the option be exercised ..losing some of the appreciationThis risk raises the question: can you predict the direction of the stock's price over the call period. Well, who do you think is on the buy side of the call you've written? Tyically, these buyers are pros who comb the newly sold options, looking for unsophisticated investors selling options into unfavorable (to the seller) markets.i think all markets are dominated by pros hoping to sucker Fools... in the case of options, mostly calculating prices mathematicallybuyers being ,IMO, a bit more speculator;sellers trying to hedge their bets.Hmmm..... having typed all that ,maybe i agree -- maybe too complicated(>,
Asked and answered many times. Many threads beat this topic to death.Google "covered calls problems" to get gory details that the proponents and magazine article authors neglect to mention.Put a cap on your profit and keep all the losses--what could possibly go wrong."If it's not worth doing, it's not worth doing well."
I occasionally sell covered calls but I'm no expert. My rule is not to sell unless the strike price is one I would be happy to receive at that moment. With that criteria I don't find a lot of attractive options pricing. I might pickup a thousand extra a year. Usually the calls expire but I recently had one exercised. I'd sold calls on that stock several times. Left a little on the table when it was exercised but looking at all the calls that had expired on the stock I was well ahead of the game. My view is if I can't get a strike price I want to sell at and a descent price for the call, I'm just gambling. Not worth losing a stock I like for a 10 cent call.
I do covered calls. I divide two situations: 1) buy a stock for the purpose of selling the call at a high price. and 2) sell a call on a stock I've owned for awhile and now can see a price where I'd like to sell the stock. The first is called a buy-write. The price of the call is high because the stock is volatile. You sell your potential to make a really good profit, and you for a few $ per share you've kept the risk of the stock tanking. Good way to get burned. You also pay two commissions. The risk/reward is exactly the same if you sell a put at a price where you'd like to buy the stock, and that is just one commission. Fewer brokers will let you do it, however. Selling the call on a stock you've owned for awhile and you already have a long-term capital gain has, for me, had a better chance of turning out well, particularly if the stock is a good payer of dividends. If one is getting close to expiration time and the option is in the money, you look for the option to be exercised the day before the stock would go ex-dividend. The buyer of the call just took the dividend away from you. So you need to be aware of this and decide whether you are going to let the option be exercised, or buy it back. If there isn't a dividend involved, the option isn't likely to be exercised until expiration. When an option is exercised, a discount broker may charge a commission considerably higher than your normal buys and sells. You need to know what the figure would be for your broker. There is a board here "Options--You Make the Call". You can check over there. At one time there were mutual funds with the word "Plus" in the title. They wrote covered calls on their stocks. The good stocks got called away and they were left with the dregs. These were funds that were supposedly run by professionals. Beware. The strategy has its uses but you have to be selective. Best wishes, Chris
I know I'm a bit late to the discussion, but I sold covered calls Jan-April 2009 and wanted to throw in my two cents.If you're looking for appreciation, selling covered calls might not be the best approach. You look in your max profit for current income.Of all the covered calls I sold, I was only assigned a couple of times, mainly since I was selling them in a downward market. The current market is trending up. We're up 23% over the last 6 months, so there is some rumblings about an upcoming correction, but timing that could be difficult.When I sold calls, I sold at a price that I was willing to sell the stocks for. If I was holding Microsoft at $17.79, and I was willing to sell at $21 a share, I'd look into selling covered calls at that price. If I couldn't find a good premium for that price, I wouldn't sell a call at a lower strike price.Right now I'm learning more about buying calls. I've make my first purchase, and am holding until I see how that turns out.WRJ
Very nice post!!
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