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Old 09-21-2015, 08:38 AM   #661
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OK, I dont get 6% return from this. He's calculating his return based on a starting value of $954,240, when his actual starting value is $1,115,540 which he doesn't have. He only has $1,000,000. Since this is an IRA he cant go on margin to buy the 6000 shares. So he would have to buy slightly less shares and sell slightly less calls. In the end his return is going to be closer to 5.2%

Also, there's a very high probability that the calls with get exercised early so the divdends are going to be hard to collect. I know he knows that, but it will happen a lot.

That's one of the many reasons I prefer selling puts.

He has a million and he's using 954k of that. Thats buys the 6000 shares and sells the 60 calls. That's the starting value. Plus he has the extra 46k to use how he wants.

You could be right about the dividends, I just don't know when they're more likely to be called.


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Old 09-21-2015, 08:49 AM   #662
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I haven't found early exercise to be much of a problem actually. I have some really deep in the money plays that I would have thought would be exercised for the dividend, but nope.
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Old 09-21-2015, 09:05 AM   #663
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He has a million and he's using 954k of that. Thats buys the 6000 shares and sells the 60 calls. That's the starting value. Plus he has the extra 46k to use how he wants.
One thing to remember that might clear it up is that he doesn't need to go on margin to buy the stock. He can execute a "buy-write" combined trade that subtracts the proceeds of the sold calls from the price of the stock, so the total is 954k, i.e., under his million.
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Old 09-21-2015, 09:13 AM   #664
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As for why there may be interest in these deep in the money calls, it might not just be for portfolio insurance.

Consider that someone might create a call spread, by buying the $165 calls and selling closer to the money calls, like $190 calls. If they do that for $20 and make a 25% return, then this provides a market for the deep calls when it was thought there was little interest in them. Everyone wins!
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Old 09-21-2015, 10:41 AM   #665
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OK, I forgot you could do the covered call as one transaction. Makes more sense now. As far there be no open interest, I guarantee that if I put an order in right now to buy or sell those calls and I put my limit order between the bid and ask, it will get filled within a few minutes.
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Old 09-21-2015, 10:42 AM   #666
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Overall, I think this strategy is a very very low risk and conservative way to use options to juice your portfolio returns a bit.
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Old 09-21-2015, 02:21 PM   #667
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Recent [Mod Edit] comments about drug pricing control plan created some bargains in biotech land today. I am in for a few ten k of various bios that dropped 3%...I expect they will bounce back later this week if the market continues up.
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Old 09-21-2015, 09:30 PM   #668
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... Everyone wins!
No, I believe someone still loses.

In the case of the conservative deep-in-the-money covered call strategy of SPY at 165 we have been talking about, if the market drops the article author still gets his 6% gain up until the market is down 15% from the current level. After that he still loses, but less than the market. His gain relative to a buy-and-holder comes out of whoever buys the calls from him. Now, his call buyer might have hedged his own way, and passes the loss to another market strategist, or spreads it around several other market players, but someone loses.

And on the other side of the coin, if the market goes up 10% which is really 12% after dividends, the article author is still stuck at his 6% objective gain. His underperformance of 6% relative to the market is now extra gain in the pocket of his call buyer, who is holding an appreciating asset.

The only mechanism that "prints money" and gives most everyone more is for the market to go up. In a bull market, everybody feels like a genius, whether he wins a little by investing conservatively, or a lot by leveraging. In a bear market, if I lose less than the market, I should feel smug.
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Old 09-21-2015, 09:33 PM   #669
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selling on the top of the up day, I feel happy. having cash to invest on a down day.. ok. ... but if it keeps going down, oh my
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Old 09-22-2015, 02:49 PM   #670
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No, I believe someone still loses.

In the case of the conservative deep-in-the-money covered call strategy of SPY at 165 we have been talking about, if the market drops the article author still gets his 6% gain up until the market is down 15% from the current level. After that he still loses, but less than the market. His gain relative to a buy-and-holder comes out of whoever buys the calls from him. Now, his call buyer might have hedged his own way, and passes the loss to another market strategist, or spreads it around several other market players, but someone loses.

And on the other side of the coin, if the market goes up 10% which is really 12% after dividends, the article author is still stuck at his 6% objective gain. His underperformance of 6% relative to the market is now extra gain in the pocket of his call buyer, who is holding an appreciating asset.

The only mechanism that "prints money" and gives most everyone more is for the market to go up. In a bull market, everybody feels like a genius, whether he wins a little by investing conservatively, or a lot by leveraging. In a bear market, if I lose less than the market, I should feel smug.
I executed the trade this morning. 700 shares of SPY and 7 calls at 145 (not 135). Theoretical gain for the year will be 4.42%. I did this with Fixed Income part of my portfolio. The rest is in bonds and CDs.

If the market tanks to 1450 over the next year I think I would be rebalancing into stocks anyway, and the amount that I would rebalance and the amount of SPY are similar. I'm well aware this is yield chasing, but so far I cant see a downside, but I've been myopic before

The trade didnt go through at midpoint between bid and ask, I had to wait until the bid moved up (as the market went lower I think).
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Old 09-22-2015, 03:20 PM   #671
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This locking-in of a modest 4.42% gain is reasonably safe, and it is not at all like yield chasing, meaning buying high-dividend stocks.

I like it a lot better than buying bonds that barely cover inflation right now yet have higher risks. And yes, if the market crashes that hard and you are forced to hold the stock, it may be good for you long-term anyway.

A problem I see in the execution is the timing between buying the shares and selling the options. With the market as crazy as it has been, a time skew between the two actions might cause your return to be a bit more or less than what you initially compute.

And the perfect time to lock in this 4.42% return was earlier, when the market was higher so that we started at a higher base. Sigh... No, I take this back. If the cash to buy comes from a bond or fixed-income, then it does not matter when the strategy gets implemented. I was thinking about my own recent stash of cash that came from changing stock AA from 70% to 60%.
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Old 09-22-2015, 03:26 PM   #672
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This locking-in of a modest 4.42% gain is reasonably safe, and it is not at all like yield chasing, meaning buying high-dividend stocks.

I like it a lot better than buying bonds that barely cover inflation right now, yet have higher risks. And yes, if the market crashes that hard and you are forced to hold the stock, it may be good for you long-term anyway.

A problem I see in the execution is the timing between buying the shares and selling the options. With the market as crazy as it has been, a time skew between the two actions might cause your return to be a bit more or less than what you initially compute.
its executed as one trade, as a "buy write", so that's not an issue. However the bid and ask for the options are far apart, so that could skew it. I calculated out the potential % gain before making the trade by using the latest "bid" in the calculation.

Actually the one thing that might determine the percentage the most is the VIX. The higher the better since you're selling calls. In the original example from the article he was using a VIX of 27 which delivered better results I think.
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Old 09-22-2015, 03:32 PM   #673
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Lets us know if the calls get executed early. I think its a good trade.
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Old 09-22-2015, 03:33 PM   #674
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I just looked and saw the volume of 7 contracts of yours at that strike price, and no others today.

That brings the open interest to 143 contracts out for that particular call.
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Old 09-22-2015, 03:36 PM   #675
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You will collect more premium when the VIX is high but you cant really worry about that. If you plan to do this on a regular basis every year, then you cant be out of the market waiting for the VIX to rise or you could be waiting a long time with your fixed income portion doing nothing which will chew away slowly at your return.

You could split the fixed income portion into 4 portions and make 4 overlapping quarterly trades sort of like laddering bonds. That way you would get a variety of VIX levels and not get stuck with one super low VIX value (although we are still above the historical VIX avg right now)
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Old 09-22-2015, 03:38 PM   #676
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Lets us know if the calls get executed early. I think its a good trade.
Will do.

Although the worst that can happen is that I have a gain of a little over 1.5%, even if they called it tomorrow.

(that kinda sounds too good to be true)
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Old 09-22-2015, 05:40 PM   #677
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@bmcgonig, thanks for posting this trade. I like it. Good luck!
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Old 09-22-2015, 07:12 PM   #678
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Recentcomments about drug pricing control plan created some bargains in biotech land today. I am in for a few ten k of various bios that dropped 3%...I expect they will bounce back later this week if the market continues up.
As expected, my biotech trades bounced back, especially Gilead, hitting $106.50 from a low of $102 something (I purchased calls when it was $103.80.

$7,900 in 24 hours. I should get a room comp'd or something.
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Old 09-23-2015, 09:10 AM   #679
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Wow, your timing is impeccable.

I only look at the stock screen a few times a day, and do not follow any individual stock in the biotech sector. However, I saw that the bear ETF biotech that I still had closed up yesterday. Trying to make money trading intraday is too tough for me.
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Old 09-23-2015, 09:16 AM   #680
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Actually, timing it perfectly is very hard. I could have made a lot more if I could buy exactly at the bottom and top for the day. The important thing is to buy at a lower price than you sell

Also important in this volatile period is to not get greedy. If the stock is going to bounce up and down up and down, you sell when you have a profit, because it will be going back down soon. I abandon the stock if it breaks out...I don't chase it higher.

For Gilead, I would be buying at $102 to $104 area and selling at $106 to $108. If I sell at $106 and it goes to $112, I don't buy it, I just sit in cash until it goes back to $103. It seems to do that quite often, but eventually it will get above $110 and stay there.
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