>> The problem is that during months when the stock goes down...
Imo, CCs are not a good strategy for a trader. If you aren't committed to a lt position in a specific stock, it is best avoided.
Actually, Frank, this is precisely what I am trying to work up examples with, no trading, sticking with one stock, and ignoring the market except during the monthly buy-sells. But every stock goes down as well as up, and I think the problem is that if the stock's volatility exceeds the premium %, eventually your stock's value gets eroded -- if slightly -- but all of those knicks over time can get very destructive. And you can't make up the losses in underlying value during bad months by gains during good months if you get called out during those months.
>> The fatal flaw is that during months when the stock goes up, one gets called and the gains are capped.
In a taxable account, the name of the game is never to be called out. Instead, buy back the call, take the short term cap loss, and retain the profit in the underlying position.
OK, this makes sense, even in a non-taxable account. However, this is the direct opposite of what many say, that you WANT to be called out. The intutitive thing is to want to be called out every time, but that is inconsistent with doing CCs on the same stock, or with just writing CCs and going fishing. So, this strategy is still very interesting, but you do have to watch the screen.
>> Maybe this is why McMillan says that CCs are used when one is slightly bullish, or at worse neutral on the stock.
Well thought out LT positions are always based on bullish presumptions. Therefore, the volatility of the base position can be ignored. But the key is to recognize that CCs are an income producing rather than wealth building exercise.
Yes, and I do understand the latter. In my example, I am just trying to maintain my underlying wealth, while producing income, which is why I am assuming the stock stays the same, just moves sideways.
I'd suggest you transition from a theoretical analysis to paper trading CCs around some of your long term positions.
Well, I have done some actual CCs with QQQ and RMBS, and will see how it works out. But I am not about to commit a substantial sum to this strategy until I work it out theoretically. As far as paper (or actual) trading, the problem is that it takes a long time for the downside to become evident, and you can be like one of those crabs in a slow cooker :-) |
