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  • matollionequay matollionequay Jul 18, 2008 11:03 AM Flag

    Sell covered calls

    Recent experience. The price was at 25.80. I sold the July 25 for 2.00. I bought it back to close at .35. So I made 1.65 on the drop and still own the stock which is now well above 25. Shrewd? Dumb ..cking luck is more like it.

    I have sold lots of covered calls.
    It generates income and is pretty much fun. However, over the long haul you end up losing your best picks and keeping your worst. Look at how much price appreciation you would have lost in the last few days if you'd sold the July 25 when the stock was at 20.

    In a stock like this the premium plus the dividend is pretty nice income. If you generated an extra buck per year in call premium, this would be generating > 10%.

    That could be pretty sweet in a tax advantaged retirement account but in many of those accounts you can't buy the call to get out. So if you'd sold the 40 call when the stock was at 40.50, there'd be no way to get out until the expiration and you'd sit and watch yourself get screwed.

    All this off the top of my head is another way of saying: You'd better know what you are doing. I'm pretty sure I don't.

    But it's huge fun.

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    • they wouldn't let you buy it back if you didn't have the cash available. example, have 4000 cash, buy stock 100@40 then sell call for $2. you have a $200 cash balance minus commissions. if stock goes to 45 and you want to cover, that call will be over $5 and you don't have the cash, and the account cannot support a debit.

      and in the long run, writing covered calls in a market like this is the same as running in front of a bulldozer to pick up an aluminum can to recycle. worth 5 cents, but not worth it. either own or don't own, but playing games with pocket change and liability is a sure fire way to lose more money. think of all the traders who wrote covered calls last month. even after the largest 1 week rally in financials I've ever seen, they are way underwater. time (theta) didn't save them nor did the lower basis. they are flat out staring at a loss. writing covered calls is the same thing as selling naked puts (assuming dividend anticipated properly). would you write puts on BBT and assume it's a safe trade?

    • I agree that this strategy has a lot of implications and a lot of ways to look at it. One of the bad implications is missed appreciation, so it helps to sell at a strike price at which you'd be comfortable losing the stock. Another strategy (which I don't like as much) is to roll up and out, buy to cover the call you sold and sell another at a later expiration date.

      The idea that you end up with losing stocks over the long haul and losing your winners is interesting and I definitely can see how that could happen.

    • Hah, sounds like you have a pretty good grasp of it to me. I too sell calls on my positions now and again. It's good you pointed out the 'losing your best picks and keeping your worst'. That is definitely true, especially if you are playing in an uptrend.

      I think covered calls are best in down and sideways markets, I quit writing if I think the trend may go positive soon.

      One other item to add - if you sell calls that expire in less than 30 days in a taxable account, they won't be qualified, and this does change the tax treatment. If you want to sell calls - be sure to go read and understand the tax code for covered call writes!

      • 1 Reply to malfactorius2
      • Selling covered calls work best for slow moving (low beta) stocks paying generous dividends. Hopefully upward moving over time.

        For stocks as volatile as BB&T has been the past few months you are better off picking points at which it plummets 10-12% in a very short period, buy the stock and sell it when it ticks up and take a 5-10% gain and wait for it to happen again. Ha been working well for me.

    • That could be pretty sweet in a tax advantaged retirement account but in many of those accounts you can't buy the call to get out.

      Comment: I have never found that to be the case. You can't buy options to open, but you can buy to close in IRA accounts.

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