Hi Walkman:
It appears that in a rising market, it can be advantageous to roll-up or just sit tight; conversely, in an unforeseen market correction/slide, you are obliged to unwind your call (at a small cost) and re-write ATM calls based on the current price. My only concern is that in the example of ELON, you may be doing that quite a few times within a 30 day period. Is this making sense?
Yes.
Buyback and rewrite on a falling stock price lets you write ATM calls, then buy them back for 30-40 cents on the dollar as both going OTM and time decay cut the premium, and rewrite at the current max (ATM) premium. If near expiration, you can wait until just before expiration (Voltaire likes Thurs PM or Fri AM as I recall) to buy back at minimal cost and rewrite into the next month. Profitable.
If the stock drops too far, you want to avoid writing calls at the bottom if possible, so you try to stop at some point. Judgement call. For example, at 30-50% down from the top.
Rule 1 per Voltaire - write covered calls with stocks that you would want to hold for the long term, that you have confidence in. More practically, stocks that will come back from a major correction.
Given this rule, there shouldn't be any reason to sell the stock when its down, and you have justification for rollup/outs if you write a call at the bottom and the stock rebounds.
Re writing on the way down, multiple writes/buybacks/rewrites give you a somewhat better return, but take a lot more time and attention and judgement than just letting calls expire.
- Dwayanu |
