I don't think you can call X% or Y% as "return". These numbers show downside protection, but not return. Hence a question: when you're not called on a stock, but its price is above your breakeven point, do you normally sell the shares the following Monday, or look to resell more calls?
Thanks for the comments, DiB. This is a strategy that is very much in its beginning stages. It's taking me deeper into cc strategy, deeper into my own sense of what's possible in this market, and deeper into my own psyche about the perils and rewards of option trading.
My present strategy is, when called out at option expiration, the money goes back into the pool. I spend the weekend looking at a list of 6 to 7 stocks in which we have long term holdings so I know the fundamentals of anything I put in the buy-write pool. Then, come Monday or Tuesday, I simply try to use the money from the expired stuff to buy the best return, next best and so on. However, I should hasten to add that's not mechanical. Lots of other variables get factored in, in a somewhat confusing way at the moment. Our own seat of pants reading of the stock's prospects over the next month--quarterly reports, etc., place in trading ranges, etc.
If I'm not called, at the moment, I simply leave the stock in the pool. The only one that's the case is Siebel and it's clearly my training wheels stock. Right now I think I should have sold the Sept 10s with the stock at $9.50 rather than take that miniscule option premium to stay at $12.50.
I think keeping the stock in the pool right now is the best strategy because all these are at such historic lows. I recognize they can go lower and, if so, I'll have to face that.
Of course, I could do as I think your point suggests. Just establish a downside limit at which I'll sell the stock. I clearly need to think this case thru. Any advice would be welcome.
I've been doing similar thing past several months, with the difference that I look for calls with better downside protection. Thus I settle for closest ITM calls one or two months out on 4-5 stocks I don't mind holding long term that developed some sort of a base. Usually they give about 5-10% return if called, and if not - a good opportunity to get a great return next month or two.
I'm doing it to develop a large enough pool of money to try to establish a reasonably serious income stream from buy-write. The goal is to get to that point within the next 18 months.
Sounds like, despite different goals, we have somewhat similar strategy. I try to sell the closest OTM rather than the closest ITM but would do the latter if it looked as if the balance of returns (called or not called) merited it. |
