hi slacker711,
I have been selling the occasional CC on my Qualcomm position. It is in a taxable account so I definitely have to worry about being called. I have been pretty conservative and have generally sold calls against only a small portion of my position (usually ATM).
the following doesn't particularly have anything to do with you, slacker711, but your comments brought to mind a few things...
the thing i don't like about covered calls, in the context of certain nonexistent, hypothetical investors who think they're diversifying their portfolio by, for example, adding a storage "gorilla" and a back-office software "gorilla" to their wireless "gorilla" (with a portfolio weighting of 33% each!), is that CCs can get people thinking bassackwards about what "conservative investing" means.
that is, they sell CCs to make "easy money" and they think their "risk" is that they will get called out at a strike price on certain hypothetical equities, which could be trading at high multiples of rather specious earnings and sales. such hypothetical persons might fill their time worrying about "repair strategies" and such.
to me, this kind of CC selling is problematic on two levels:
Level I: Tactics (the nitty-gritty of doing call writes well)
when one even talks about "repairs" in the selling of covered calls, this sounds to me like "psuedo-naked calls". that is, the call writer really doesn't want to part with the stock, and is thus in an effectively similar situation to the naked call writer (outlier cases excepted), but at the same time relies emotionally on the "safety" of the calls being covered to avoid taking other, more deliberate (and costly) hedging steps (e.g., credit spreads). because of the emotional "safety" factor, one may get careless in writing the calls (moreso than a true naked writer [which may or may not describe my immediate capacity, LOL]) under the "what's-the-worst-that-can-happen" theory; even though, should the stock soar, one is likely to try a messy "repair" job which is surely a nasty shot in the foot.
in my opinion, a covered call should not be written unless one is willing to be called out. that doesn't mean there couldn't be some adjustment, such as buying back for 1 dollar a call one has sold for 5. but if one ends up buying back for 15 what was sold for 5, then this sounds more like a "pseudo-naked call" to me--and that's not effective on a tactical level.
Level II: Strategy (Investment Policy)
perhaps the more serious problem, for the abovementioned hypothetical type of investor, is that he may end up barking up the wrong tree. that is, while the majority of his energy would best be spent getting the "big picture" stuff right--that is, choosing and implementing a prudent asset allocation policy--he may have completely overlooked this important practice. call premia have come down quite a bit anyway, and on a monthly basis they are very trifling compared to portfolio value. if one gets caught up trying to bag 3-5% a month on CCs but in the process loses 60% in a falling stock market, then one has put the cart before the horse.
i used to sell quite a few CCs and had some good months and some bad months. but looking back, i feel these actions were just distractions from the more important issues i needed to address w/r/t my portfolio. those issues have everything to do with setting up a proper asset allocation policy. that is not to say one couldn't sell covered calls and be prudent at the same time. but i think the policy horse needs to lead the tactical cart (CCs).
i haven't sold CCs all year and do not plan to soon (as i am moving to an indexing strategy), but if i were to implement such a plan, i would select a very broad basket of equities across many different industries, market cap sizes, and growth/value styles, and i would sell ATM (where premia are best) and i would ALWAYS let myself get called out when the underlying trades above the strike. even then, this would only apply to at most 35-40% of my portfolio--that is, the US equity portion, since i would not find it practical to sell CCs on foreign stocks (excluding the large cap ADRs of course). another option (PTP) i would consider is to write CCs on various ETFs which may be optionable.
hmmm, on second thought, i think i'd definitely go the ETF route as that would be much simpler and cheaper than trying to do monthly writes on many equities, and would, i believe, also provide me with better diversification (within the specified US asset classes).
in any case, i'm not doing that, but that's how i'd approach it now, in contrast to my old way of holding concentrated tech positions (lousy investment strategy) and worrying about the intricacies of selling this strike or that (silly focus on trivial tactics).
just my opinion. |
