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IK, thanks for the offer. I've started a new project that is more important for my own portfolio so the charts will have to wait.

I've been trading options since late 2008 and covered calls have become an important source of income in my portfolio. More recently I discovered that covered calls can simultaneously work as a hedge. The principal objection one hears is "picking up pennies in front of a steamroller" and that's what happens when you do it wrong.

With stocks you are dealing mostly with uncertainty and the BMW Method helps to tilt the odds in your favor by buying well below the mean. With options you are dealing with risk proper because you can calculate the outcome for both, the option expiring worthless, and the option being assigned. What you cannot calculate is the potential opportunity loss which is uncertain.

The calculations are not all that difficult but they are cumbersome and time consuming done with a spreadsheet. My new project is to add a covered call calculator to my Portfolio web-app. The first and easy part is done, uploading the option chains downloaded from the CBOE website.

Today I'm starting on the hard part, converting my spreadsheets to php code.

The calculator does the following

1- Price a number of calls based on likely strike prices and expiration dates

2- Calculate premium (cash) collected, CAGR if the option expires worthless, CAGR if the option is assigned

3- Discard options that don't meet the minimum criteria

4- Order the remaining ones. So far I do this last by eyeballing. I don't know if I can come up with an algorithm for it.

That's the sell side. On the buy side the calculator should check to see if the option is worth buying back. Short call options are decaying assets, the most you can make is the premium collected. If the premium falls low enough then it's worth buying back the call option and to look for opportunities to sell new ones.

That's my current assignment! ;)

Denny Schlesinger

PS: with the kind of stocks I own the above strategy produces between 4 and 5% cash returns which pretty much covers my routine expenses, a good reason to do it right. The major risk is opportunity loss should a stock take off (pennies/steamroller). To mitigate this risk the strike price has to be high enough to make the stock worth selling. Initially I lost several stocks this way, six in all. I have since learned to roll up the option which is the hedging part of the strategy -- you give back the premium but keep the stock.
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