I do not understand the lack of understanding of covered calls.
If you buy a stock, you obviously expect it to go up or you wouldn't buy it. However, there are times when you feel it is going to pull back a little or bounce against resistance for a while.
Selling a slightly out of the money call does 2 things. 1. It puts some of your capital back in you pocket, where it can be put to good use and it relieves some of the pain if the market drops. 2. It nets you the premium and the amount the stock was below the strike when the options was sold over a very short period.
Using CYMI as an example, however, I would NOT do this right now.
If you were to sell the November 40, you can get 2 1/8 it. With CYMI at 36 1/2 by 36 11/16, if you bought it today at the ask, 36 11/16, it reduces your basis to 34 9/16. The market must drop almost 6% before you are at break even. If the stock goes up and you are called, you receive $40 for a stock that you have for a basis of 34 9/16, for a 15.7%return in 38 days. IF you could do this each time, that is a 306.9% annualized return.
While Curlton appears worried about missing the "home runs" if the stock really takes off, they don't take off most of the time
Exactly what is the downside that you can see?
I think it's more the long bomb and a prayer or 4 yards and a cloud of dust. The bomb is more exciting, the 4 yards is more reliable.
Ira |
