But your advice to wait for an upday to sell again is confusing. The source of my confusion is as follows.
I'm assuming the best time to write ccs is either in a non-trending market (going sideways) or in a slightly down market (for ccs written against stock one owns). Sound right?
No, that is not correct. Sideways or UP-trending is what you want. Remember, you are a contrarian when you go short by selling calls. That means that when everyone is madly buying calls, on a generally upward trend, you are willing to bet that they are overestimating the degree to which the stock will rise over the next few weeks. During this (overly-)optimistic phase, the buyers are anxious to get in. They think the calls are a great deal and because of the risk that they are correct, the call writers must make them pay for the privilege of owing the call in this optimistic setting.
Just ask yourself, when would you want to buy a call? Answer: When the short-term future starts looking really great. Then, as a contrarian who thinks the super-bulls are smoking the good stuff, you do just the opposite - you sell a call to them for a good price. Remember, you are taking a risk too and if they expect you to stick your neck out in the optimistic environment, well, then they'll have to pay. You are banking that their optimism is overblown and the stock will not achieve the levels expected by the these bullish (and enthusiastic) buyers.
Ultimately, you are betting their expectations are improbable. But you are more than willing to service the buyer's needs by letting them play the game with your money (i.e. your long stock position) for the next month or so. But in fairness to you, the better the stock's outlook, the more dear the price.
What do you think about this?
(As an exercise, tell me what factors make the premiums go up and down.)
--dfl |
