Please elaborate more on your strategy
In past posts I have painstakingly gone thru how I've approached this-writing against only a portion of shares I already own, not wanting those shares to be called away, comparing the value on a $/day basis between various months, being happy with a 30% profit in a few days or a 50% profit in a few weeks, writing only a few contracts at any one time so that the absolute $ value of the contract relative to the commission was important, not having a real firm belief in the specific direction of the market but feeling that over enough time the market would meander in such a way as to allow profit to be taken. That's all I can think of off the top of my head.
I have done some buy/writes and written some lead month calls also, where time decay is the primary factor, but mostly not. I just got my McMillan on Options yesterday, so may be better able to explain using the correct terms at some future date rather than my feeble attempts at re-inventing the options wheel, but for now, here goes.
It appears to me that there are two (at least) things going on with calls, one being time decay and one being leverage. Using QCOM between 7/2000 and 7/2001, the Jan 03 100's, which had a lot of time left in them and were way out of the money most of the time, traded between the low 20's and low 30's for quite a while, then moved to the low teens to the high teens, and now seems to be trading between roughly 6 and 12. Lets say the price of the stock averaged $65 with the high and low being roughly $105 and $45. I'm guessing at these #'s from memory and a quick glance at the chart. It was my experience that a steady 10-15 point move in the stock (roughly 15-20%) resulted in an 8-12 point move in the call for an approximate 50% move. This allowed me to buy and sell, or sell and buy, the movement in the stock relatively cheaply and make a large % return on my investment. While it might be said that it took a certain amount of luck or skill "calling" the top or bottom, I really didn't use anything other than the fact that even in an up or down trend, a stock doesn't move in a straight line. Often I bought or sold only to see the option price move a few more $'s before turning. Since there was a lot of time left in the option I was able to wait with relatively little stress for the inevitable turn around or bounce. This is a luxury that leading month writers don't have. Further, because I owned more of the underlying than I wrote against, I had the psychological benefit of knowing that even if the stock moved much higher I would still profit. This definitely helped in the stress/patience area.
It still requires you to take a position based on what you think will happen. With leading month ITM, ATM, or near OTM options to work well, that is, without a lot of stress and fall back position thinking, you either have to be doing buy/writes where having the stock called is completely part of the plan, or you have to be a whole lot more accurate in predicting what is going to happen and when.
All this is obviously JM(uneducated)O. A while back I posted my results for the year, which very pleasantly surprised me. This month I have stepped up the activity a little, engaging in 6 completed transactions involving 14 contracts-an average of 2.33 contracts per, and my holding time has dropped to about 16 days on average. This is partly a conscious choice (if it works for 1, why not 2 or 3), and partly what the market has given me. Last week CREE moved between $20 & $24, a 20% range and not in a straight line. The Dec. 25's, 30's,& 35's bounced all over the place between $2.50 and $5.00 (roughly). I was lucky enough to be generally on the right side of most of those moves. If I had not been, I would have patiently waited (I do have until mid Dec. after all) for some other time when a fast or slow or meandering move in the underlying allowed me to take a profit, or until the whole thing expired. These high beta stocks encourage this, again IMO.
ARS |
