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eagleoptions
6 posts
msg #32694
Ignore eagleoptions
7/27/2004 11:12:39 PM

I am studying covered calls and request information from anyone who
is trading covered calls profitably, such as SF filters used, web-site
resources, etc.
From what I have studied, it is best to buy strong stocks after pulling
back from resistance and then starting to move up from support and sell
OTM calls when the stock price reaches resistance. What I want to know is
why not just buy calls and if the option is ITM at expiration, exercise
your right to buy the stock and then sell calls? That way your initial
investment is much smaller, which would result in better diversification than buying stocks initially. If some of the options decrease in value significantly, just take your loses, and hopefully the ones that did go
up will more than make up for the losses. For the options where money was
lost, you wouldn't have wanted that stock anyway.
Are there any SF members experienced with covered calls can say if this
is a viable strategy, and if not, why?



cegis
235 posts
msg #32699
Ignore cegis
7/28/2004 3:37:49 PM

eagleoptions,

I did *REAL* well last year trading deep in the money short term covered calls. My target was a 2% return for calls expiring on the next expiration date, and that are at least 20% in the money, expecting to get called out. My choice of stock had little to do with how much I liked the stock. It just needed to fit the 2%/20% rule, and I needed a confidence level that it wouldn't drop by that 20% before expiration (i.e., no earnings due or other pending news). It worked a very large portion of the time, but I did have a few stocks that tanked. Lately, however, there hasn't been enough volitility in the market to find such covered call setups. I use poweropt.com to find these, as they have a filtering system that is built for option position searching. Generally, I'm pretty happy with the site.

As for your "why not just buy calls..." question: One way to cover a call that you sell is to buy a longer-term call at the same (or similar) strike. Buy the call and sell the call at the same time. If your short call is exercised, you just exercise your long call. If you short call is not exercised, you can write another after it expires and repeat through the expiration of your long call. As for buying a call, then exercising it if it's ITM, THEN writing a call, what you are really doing is playing a long naked call, until you decide to exercise it. It's true you can make a lot of money with calls, but you can also loose a lot! Remember that buying a call that expires results in a 100% loss!

My suggestion to you would be to paper trade some covered calls over the next month or two. Pick several for each month - regardless of if you think it's a "great play" (mediocre will do). Pick setups that are the type you want to trade. BEFORE you set up the position ("a paper buy/write"), do the calculations to see where you'll be if the stock goes up, goes down, or stays about the same. Also, make a prediction as to what you think will happen to the stock. THEN, follow the stock and option prices until expiration, and see how you do. I find this is pretty easy to set up in a spreadsheet. Don't forget commissions, as they are relatively huge for options trades when compared to stock trades.

HTH,

C


eagleoptions
6 posts
msg #32701
Ignore eagleoptions
7/29/2004 12:13:13 AM

cegis - My online broker (MBT)does not allow option spreads, only covered calls.
I do not understand your reply that I would be playing a long naked call if
I first purchase a call, exercise it if it is in the money and then sell a
call. When I excercise the call I would own the stock, so the position would
not be naked.
I understand that there is the possibility of loss with purchase of calls
due to time decay, but I would plan to limit that buy not purchasing them if
overvalued and also by limiting my loss to 50%. If I had $2K to trade,
and for safety purposes, traded 50% of it at one time, for example, I could purchase 1 call @ $2 ea. of five different stocks that are in an uptrend.
If I chose those options wisely, I would assume that I could pick 3 of 5
options that expired in the money, and the other 2 I took a 50% loss for
$200 total. For the 3 that expired ITM, lets say that I could only exercise
2 of them (due to my account balance), so I would then keep the premium from
1 of them and exercise the options on the best 2 stocks, and then sell calls on them. I would assume that the funds from the calls sold plus the option premium for the call not exercised would more than cover the loss on the 2 options that hit my 50% stop loss. That way I would have 200 shares of
stocks that are good covered call candidates for an initial investment of
$400 knowing that they are in a continued uptrend, versus buying 100 shares stock for $1,000 without being able to diversify. If that stock tanked, it is possible
that more than $200 could be lost. I would appreciate any comments on this.
Another question I have is if I purchased a call option for $2 and it
has a value at expiration of $4, and I exercise my right to buy the stock,
do I get to keep the $2 premium, or will the cost to exercise be $400?
Thanks for your input and the poweropt. reference. One site I subscribe
to is optimaloptions.com. This site has daily covered call picks for about $9
per month.



cegis
235 posts
msg #32709
Ignore cegis
7/29/2004 4:26:37 PM

eagleoptions,

A few MAJOR points:

1) The cost to exercise an option has NOTHING to do with the options value. The cost is 100 (usually) times the STRIKE PRICE. Expanding on your $2 option now worth $4: You might pay $2 for a 35 strike TASR call when TASR is trading at $33 or $34 (rough guesses, but will illustrate my point). If at expiration, TASR is trading at $39, your call will have a $4 value (39 - 35). To exercise your call, you need $3500 (100 * $35 strike), plus commissions. You "lost" the $2 premium when you bought the call, so your net profit, if you sell your TASR shares immediately, will be roughly $200. (You could also sell the call without exercising it, and get your $4, or $2 profit, that way, too.)

2) Just because at some point in your hoped-for scenario you have a covered call position does NOT mean that you are "doing a covered call". The covered call exists from the point you own the stock AND have sold the call, through either expiration or exercise of the call. Any calls before that are naked calls (at least the way I use "naked"). Your broker may very well not allow you to do the trades (naked long call) leading up to the covered call trade.

3) It's REALLY, REALLY, REALLY hard to make ANY money with options trading them 1 or 2 at a time. This is because commissions end up being such a huge percentage against your trade. Buying 1 call at $2 will cost you roughly $235 at an on-line discount broker like Ameritrade. That's 17.5% commissions. That gets doubled if the call is exercised or the position closed prior to expiration. Even with bigger trades, the time decay of the option, plus the fact that the option's beta is less than 1 (sometimes much less), means that the underlying stock has to go up a large amount before a trade becomes profitable. "Choosing your options wisely" is VERY difficult. Getting 3 of 5 in the money is even harder.

4) Remember that if you want to limit your losses with an option, you need to be sure that there's a market for the SPECIFIC option (stock, strike, and expiration) you are trading in. (Look at open interest.) If no one is interested in taking the other side of your trade, you will most likely NOT be able to limit your losses to "a mere 50%". Also, the spreads (ask - bid) on some options can be a very big percentage. Make sure you leave enough "room" below the current bid of the option you're trading so that your 50% floor is not hit too quickly. Lastly, don't forget to figure in commissions when you determine what you need to sell your call for to end up down 50%.

5) I may be wrong here, but I doubt your broker does not allow ANYONE to trade spreads. They very well may not allow YOU to trade them, until they have at least some (perhaps minor) level of confidence that you know how options work. The best way to learn is by writing covered calls, which is why they'll tell you they don't allow spreads.

6) Read all you can about options. Read it all again. Draw graphs showing profit/loss at various stock prices for a bunch of calls, so you can SEE what happens to call values when the price of the underlying stock goes up or down. Lastly, PAPER TRADE - WITH COMMISSIONS - a whole bunch of trades to see what REALLY happens once you dive in. Calculate max loss. Calculate max profit for covered calls. KNOW THE TRADE before entering it!

7) I'm not sure if it's "technically correct", but I use the term "naked" when there is no offsetting position. So my "long naked call" is simply owning the call. I'd use the phrase "short naked call" to indicate you sold a call without owning the underlying stock or a long covering call (in the case of a spread).

8) Although I've used short-term deep in the money covered calls in the past, you can also make a very good return selling longer term near the money covered calls. This might be a good place to start your forey into covered calls.

9) GOOD LUCK! But just remember, there's a reason options have such a high potential for gain: they're risky!

HTH,

C


gcsd63
2 posts
msg #32821
Ignore gcsd63
8/12/2004 2:10:35 AM

Eagleoptions,
I've spent a long time looking for a great options searching and screening website. I highly recommend checking out Poweroptions.com. It'll have just what you need to search for covered calls and nearly any other options combinations you want to learn about. Take advantage of the MyPortfolio tool to do some paper-trades for a while. Beyond all the good stuff, the site's main weakness is technical screening (although they said they're looking into improving). That's why I'm here. (Hey Moderator, a suggestion -- consider creating a business opportunity with Poweroptions.com - just give me a percentage!!) Anyway, I have no financial interest in Poweroptions, I'm just a subscriber. When you sign up, let them know I referred you -- gcsd63. I'll get a month free. Study and do well.
gcsd63



gcsd63
2 posts
msg #32822
Ignore gcsd63
8/12/2004 2:11:32 AM

Correction to my last -- the address is Poweropt.com
gcsd63


xraywiz
22 posts
msg #32848
Ignore xraywiz
8/14/2004 3:12:57 PM

cegis,
re your remark #3 to Eagleoptions,07/29:
TradeStation charges a flat $1 per contract. Sure, it doubles for the round, and you pay about $90 per month for their platform, but that's it.
MMF


cegis
235 posts
msg #32849
Ignore cegis
8/15/2004 3:30:37 PM

xraywiz,

Thanks for the info. I'll look into it.

C


xraywiz
22 posts
msg #32850
Ignore xraywiz
8/15/2004 5:31:24 PM

cegis,
glad I could help.
My comment about "that's it" isn't quite exact. You may want to add to the base fee a few items like nasdaq streaming quotes, nyse and cbot fees, etc., that add up to about another 20 bucks or so. I would check their website www.tradestation.com to get the exact numbers.
happy trading.
MMF


grass
10 posts
msg #33240
Ignore grass
9/14/2004 4:06:01 PM

InteractiveBrokers charges 2 per option contract and 10$/monthly for the market data.
If you dont do spreads their platform can be tolerated. Things like Iron Condors should be entered manually (leg by leg).
I did 3 covered calls which were all profitable.
QQQ spreads is a pain as you need many contracts, thus commission skyrockets.

Hope this helps,
Grass.


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