If i wanna write calls or puts against outstanding long/short positions - how far out should i go? thanks
My opinion:
Assuming you do not mind being called away (in calls), or ending up owning the stock (puts).
I think the closest month will benefit you the most (in general), since time decay accelerates as expiration nears. Therefore, the time value portion of the premium will lose value sooner, than say an option 2 months out.
Strike price is also important, since the strike nearest to that of the underlying will also give you the best reaction time value decay, (assuming the market is going your way). (Deep in the money options begin to behave closer to the underlying asset). Obviously the strike price you choose would also depend on your cost basis of the underlying. Personally, I would NOT sell a call option with a strike price below my basis of the underlying.
Other consideration would be the chart/fundamental situation of the underlying.
Using Bollinger bands (or other indicators that will suit you), there is a tendency (in general), for prices to return to its "averages".
So, if the price of the stock is or has been riding the upper band of the bollinger bands, then it could be reasonably expected that the price will revert to its average. Ideally you want to sell the covered call when the chart begins to look overbought. (the reverse would be for a put, i.e. the stock looks oversold).
Be careful of selling calls against stocks that break new highs since they could have momentum and could stay overbought for a long time. In this case you will be called away, limiting your profit by the strike price chosen.
Lastly, I try to do this with stocks that I have become familiar how they trade, each stock has its own "particularities"
All of the above my opinion, and I am not an expert by a long mile. |
