One thing I've noticed about McMillan as opposed to most of our strategies with covered calls is that he advocates selling calls with much further out time horizons, while most of us who've posted are selling them for the current or following month. Any opinions on this? Further out carries much larger time premiums, and can lock your position up longer, but seems a safer play if you're disciplined with price targets at which you would close your position. Also, in this highly fluctuating market, it seems a better bet that you could cover your position at less of a loss if a stock runs away from you in the short term.
When comparing premiums, be sure to adjust them so that the length of time is the same. A 3 month option appears to offer more premium than a 1 month option, but you can write the 1 month option 3 times during the 3 months. Thus, you should (at the most basic) multiply the 1 month premium by 3 when comparing.
When selling CCs, you are selling time. Since the value of the option decays at the rate Sqrt(time), by selling shorter options you are always selling the most valuable time. All else being equal, it is usually best to sell shorter options for this reason.
If that was unclear, try this exercise:
1. Pick a stock and a near-the-money strike price.
2. Figure out the difference in the premiums.
3. Figure out how many days are between each expiration date.
4. Divide the difference in premium by the difference in days for each expiration date.
You now have an estimate of how much each day is worth in time premium. You will notice that closer days are worth more than days farther out.
Example:
1. NTAP 25 Calls
May 25 = 2.8
Jun 25 = 4
Sep 25 = 6.4
2.
May - Apr = 2.8
Jun - May = 1.2
Sep - Jun = 2.4
3.
May - Apr = 28
Jun - May = 26
Sep - Jun = 98
4.
The 26 days between May and June are worth 2.8/28 = .10 each, on average.
The 35 days between June and Sep are worth 1.2/26 = .05 each, on average.
The 98 days between June and Sep are worth 2.4/98 = .02 each, on average.
Now, which days would you rather sell?
dM
P.S. This is also an argument for buying the longest LEAPS calls and rolling out into the longest new LEAPS calls when they become available. That way, if you must buy calls you are at least buying the cheapest time. :) |
