Covered Call Options

[Bankerwithabrain]

Anyone funding their retirement by writing covered calls? I'm thinking if you can write a 3% call every month on say $1,000,000 of stock, you can live well with little risk. Even if your stock goes down over the short term, you will sitll be able to write those covered calls for awhile and eventually it will come back. Maybe strategy is best on an index.

[utrecht]

It can be done if done correctly, but its not as easy as some people will have you believe. Selling naked puts is actually a better strategy then writing covered calls.

Also, youre not going to get 3% premiums each month if youre using an index as your underlying. 2% is much more realistic, but youre not going to make 2% every month.

There is long term backtesting that proves writing covered calls on the SP500 index has slightly higher returns with lower risk than just buying and holding the SP500. You can juice your returns higher by selling naked puts as oppossed to writing covered calls.

[Art G]

I'd say it's a tad more risk in selling naked puts then writing covered calls though. While the risk isn't unlimited, it's pretty danged high if it goes against you.

[FinanceDude]

Quote:

Originally Posted by Art G I'd say it's a tad more risk in selling naked puts then writing covered calls though. While the risk isn't unlimited, it's pretty danged high if it goes against you.

I think selling naked puts is about twice as risky as writing covered calls...........

[LOL!]

LOL!

I wrote covered calls with a specific strategy for a few years. My goal was to make an extra $1000 a month. I even wrote software to monitor options quotes and give me signals on good opportunities. I came out ahead, but it took too much work and if you haven't heard, there is no free lunch.

So give me an example of a 3% covered call that expires in a month or two. I assert that while they may exist, they are not stocks that you would want to own. No one is going to pay you a 3% premium unless there is a reasonable chance that they will make money themselves.

For big blue chip stocks, the call premium is rather small on the order of 1% per month and the strike price won't be so far out of the money that your option may not be exercised.

Anyways, I tried it with real money. It wasn't worth it. I suggest you try it with real money and report back here once every month or so.

[brewer12345]

I do covered calls occasionally. Usually, I will sell a covered call on something I was thinking about selling and I will write the call at a strike price plus option premium that I think is an attractive sell price for the stock. I do much the same with naked puts: I write puts on somethin I already want to buy.

[Art G]

I used to do a bull or bear spread on indexes near support lines for income with just a week or less before expiration. You sell a call or put for a bit more than you buy the opposite side and wait for expiration. Limits your downside risk with a nice little income potential. Worked like a charm until one day I bought an index that moved after the market closed and I got killed. Quit doing them then. Gotta remember the options actually expire on Saturday.

[utrecht]

Quote:

Originally Posted by Art G I'd say it's a tad more risk in selling naked puts then writing covered calls though. While the risk isn't unlimited, it's pretty danged high if it goes against you.

If youre selling naked puts on the SP500 index, its not all that risky. If you are a typical buy and hold investor, you are likely to be buying the SP500 index anyway. If I sell a put and the market moves against me, I end up owning the index just like you do but my cost basis is lower.

As I said earlier, there have been studies that show that when done correctly, selling naked puts on the Sp500 is more profitable and less risky that just buying SPY.

Put simply, you get more consistent returns. I have done it with real money and Im currently doing it (not retired though). Its not a get rich quick scheme but it does work pretty well.

[DAB456]

Isn't it a lot easier to let somebody else do it with a closed end fund? Like NFJ or ETW. I think some of them are also managed to produce favorable tax rates.

[copyright1997reloaded]

Quote:

Originally Posted by Art G I'd say it's a tad more risk in selling naked puts then writing covered calls though. While the risk isn't unlimited, it's pretty danged high if it goes against you.

Actually, the risk profile of covered calls is similar to to writing naked puts. (Limited upside, unlimited downside.) Although I have done them, I have tended to shy away because a) if I am thinking of selling, I sell, and b) if I like the stock, I don't want it to get called away. (Yes, I know you can usually roll the call out to a later date.)

[clifp]

I write calls on a fairly regular basis. Especially lately now that the volitality index is ~20, significantly higher than it was a year or so ago.

I have been doing it for years as way of reducing my position in Intel stock, but lately I've doing for a other stocks as well. I also write puts on stocks I want to purchase at price I am willing to buy them. There have only be a couple a cases with BofA where the stock dropped significantly lower than the put price. Most of the time the puts expire worthless or roughly at the strike price.

I think recent events have minimized the transaction cost associated with options, which make them a more viable strategy for individual investor. I typically sell 10 contracts for a $1 which cost me $16.45 at Schwab. Spreads are generally $.05 but on heavily trade options like GE, INTC, or BAC they are only $.01.

I'm still waiting for a good study on my hypthosis that writing calls reduces risk for a retiree in the withdrawal phase.

[Bankerwithabrain]

I had no idea there would be so many people trying the options method.

In the past I was speculative, mainly with long calls and long puts. Now I'm looking more for income producing options.

I recently ventured into selling a covered call on the XLF (financials ETF), but only pocketed $0.17 per share (1,500 shares). It really doesn't do much in terms of income ($255) and does significantly hinder upside (let's say the financials have a run to 30) and I still have unlimited downside. I would say this trade probably does not make sense in retrospect. (Although the feeling of getting a free $255 is nice).

Another recent position I took was with a naked cash covered put at 130. It was at $0.66 and since I have about $65,000 in a 3% savings account (yes, burning my pocket) I wrote 5 puts and pocketed $330. In this scenario I only have "end of the world" risk where the S&P drops about 8% in the next 18 days. In that case, I would end up having to purchase the S&P, which at $130 isn't too bad. I have no upside in this scenario though.

I am still really learning the best strategy for myself but I am pretty sure options somehow should factor into retirement savings. Basically if you have any sense in where the economy/market is going there is an options strategy out there. I am starting to learn more about butterflies, straddles etc...

[whitestick]

I am in retirement in the withdrawal stage, and except for a very small pension, live off covered call income. Without re-starting the wars of past discourse on which method is best, I sell covered calls primarily, with some cash covered naked puts at certain times in the method. I employ techniques to buy back and sell for higher premiums if it looks like I may get exercised on stocks that I really like, and if they haven't run away from me to the upside. On the downside, I sell calls above strike but below my initial cost, and as previously mentioned either allow to expire or buy back and roll out or up as the market is moving to recover my original share cost, while extracting the option premium to live on. My only real problem has been that I have too much in taxable account, so I pay taxes on money made, that I don't really need for expenses. I do have about the same in an IRA, and that continues to grow without paying taxes, at least right now, as I don't need to withdraw that. I'm expecting to move the IRA to Roth in 2010, when the income limits are uncapped, and after a few years to recover the taxes, should provide a nice stream of tax free income, if the the next regime doesn't change things. YMMV
Oh, and I hadn't posted much about this lately, as previously a lot of discussion about market downturns was thrown out, but the market of the last 2 years hasn't hurt results at all.