Strategies for cc writing in an uptrending market
A question for the thread. As I read both the thread and the two books on options I own (Thomsett and McMillan), the cc risk which gets the most text is that of missing out on an uptrend in a stock. Best not to write ccs in a bull market, goes the admonition. As I understand the logic of ccs now, that makes sense to me.
However, I find that, at any given moment, I'm not certain what the next month entails for stocks so it's always hard to impossible to know if, regardless of bear or bull trend, what the next month portends. I have a decent sense for the recent trends and how that might effect the psychology of call buyers and the time value (thanks to several PMs over the past week). But, as before, I find I need to think the issue through about a particular problem to see what it is and what I don't know.
It comes up because our biggest core holding is in Qcom and I would love to write ccs against it. However, I'm more than a little reluctant right now. Because it's the stock in our portfolio most likely to jump up to a new trading range without a great deal of warning. There is simply so much background news on that stock, almost all of it good, that I have fears of writing ccs on it. (I do wish to note that others are doing so, most recently FaultLine, so much of this question is directed at them for guidance).
Let me pose the question concretely, the way it occurs to me. And the strategies I see available for addressing my particular scenario. And, if anyone is interested and reads that far into this long post, I would appreciate any comments, suggestions, criticisms, whatever.
I considered writing 4 contracts on Qcom at 50 (a portion of our holdings), with a strike price of 55. I don't now recall what the premium was at the time. But it was a bit low. And one of the reasons I waited was to see it spike up a bit. My concern is as follows. The price starts a move up (thankfully). As it moves up in the next week or so, I decide not to buy back the calls, because I expect/hope it to fall back in its present trading range. And I wait because I've now learned both that the time value drops most in the last week and why it does so. But the stock climbs through to, say, 70 by that last week. Got to do something then.
1. Let it expire. If I do that, I lose the underlying losing 15 points of stock growth (the difference between the 55 strike and the price of 70) but keep the 50 to 55 differential and the premium. I can rebuy the shares at 70 which then puts that loss in concrete or I can wait, hoping for a dip to buy back. Not a good place to be if the stock is on the move. I should hasten to add on this point, that I think the overall market is very unlikely to move up so that would dampen this prospect. But I would worry, nonetheless. Thus, the problem here is (a) I lose 15 points of the runup (less the premium gain) and (b) need to buy back the stock when it's in an upward trend.
2. Buy back the calls. I would be able to keep the shares and, thus, the price runup. But, would obviously lose the difference between the sell and the buy back price of the premiums. I guess they (price runup and premium loss) would, roughly, cancel out one another. This scenario leaves me with no loss and no gain.
3. Roll the call up. When I buy back the options, I write a new call for the following month that, again roughly, covers the buyback loss plus, hopefully, some additional premium gain. I, most likely, lose the premium from the first month but am alive with the shares and hopes of a premium payoff in the following month.
Oh, yes, this is clearly one reason Frank is right about his preference for short month writing. Were I to write Qcom ccs a couple of months out and waited until the last week or so to make decisions of this sort, I would run the very real risk of a much higher price than 70.
John |
