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...that test your investing psyche.

I have on a covered call position on TXU, with a cost basis of $52. When I entered the position I stood to gain 41% annualized, if exercised, including dividends.

Am I happy to miss an 18-point gain? Of course not. But I'm always happy to take the chance of booking 41%, and my overall strategy doesn't involve depending on a few home-runs or multi-baggers.

Still, though, not being able to participate in a huge point move causes you to reflect upon why you've chosen your particular strategies. And that's probably a good thing.


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<<When I entered the position I stood to gain 41% annualized>>

If I understand you correctly, you didn't really make 41%, but only would have made 41% if you had been able to roll over you call a number of times with the stock not moving from its original position.

I really don't like annualizing covered call returns because it is totally unrealistic to assume that the stock won't move and you will be able to roll over covered calls a number of times.

The TXU example is a great demonstration of the bogus nature of annualized covered call returns.

Jim

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you didn't really make 41%, but only would have made 41% if you had been able to roll over you call a number of times with the stock not moving from its original position.

By selling the calls against the long stock position, it was a chance to make 41% annualized, as opposed to either a lesser yield in the same time frame without selling call premium or, as a long-shot which isn't part of my strategy, a huge gain if, say, the company gets bought.

I had already sold calls against this stock a number of times in previous months, but that doesn't seem pertinent to your response.


I really don't like annualizing covered call returns because it is totally unrealistic to assume that the stock won't move and you will be able to roll over covered calls a number of times.

I'm assuming the stock will move and that the short calls will be exercised, and that's regardless of the ability to roll the calls.

It seems that a stronger argument against discussing annualized gain is that the gain on each trade would have to be replicated for term 'annualized' to be meaningful.


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<<I'm assuming the stock will move and that the short calls will be exercised>>

So if the stock is called away, will you repurchase the stock and immediately sell calls against them? If your calls get exercised because the stock skyrockets, wouldn't you feel a bit hesitant to repurchase an overpriced stock?

I am trying to get a sense of how determined you are to repurchase stock and sell calls against it over and over again, regardless of what price the stock is trading at.

And if the stock falls, the calls aren't exercised but expire worthless, will you sell calls at a lower strike price hoping to recoup any loss?

Even if you are determined to repurchase stock and sell calls each and every month, the annualized figure you describe will be a pipe dream if the stock declines in value by more than you receive in option premium.

Jim
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When TXU gets called away at the March expiration in three weeks, it'll leave me with a gain that works out to be 41% annualized; had I not sold the calls then I'd have been able to participate in a much larger gain.

The psychological aspect of covered calls causing the investor to miss out on a large jump in share price was the purpose of the original post.


So if the stock is called away, will you repurchase the stock and immediately sell calls against them? ... I am trying to get a sense of how determined you are to repurchase stock and sell calls against it over and over again, regardless of what price the stock is trading at.

I'm certainly not interested in chasing the stock. I guess I'm not clear on why you're asking this; personally, when the stock is called away I usually then move those funds into a new covered call position in a different underlying.


Even if you are determined to repurchase stock and sell calls each and every month, the annualized figure you describe will be a pipe dream

That annualized figure was to give the reader a frame of reference for that particular trade, in the context of the original post. I guess I could have worded it in terms of getting an approximately 7-point gain rather than the 18-point gain I would have had I not sold the calls.

I'm not making an argument for the use of 'annualized gain' as a metric with which to compare and follow covered call positions.

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