Hi Tim, RE: " Some income is generated, but upside is limited. "
True, but there's also the concept of rolling it over - pushing the call out.
Not black & white mathematics, not binary, but it's more like a stream of possibilities or a weighted tree structure, with shades of gray as the possibilities.
RE: "So long as Intel stays approximately where it is, a good deal."
True. Also an okay deal if INTC dips too (assuming one is focused on accumulating # of shares and can temporarily let go of valuation, i.e. ride out the valuation dip.)
RE "However, what if Intel goes up and the shares are sold out at $20 instead of $28?"
Roll it over.
RE: "So, who is right? Well, efficient market theory (which is not perfect) basically gives us the answer: a wash. "
No one methodology is right. I think consistency in methodology is the key for an average return. If someone goes on the deep end in either direction, they will be either wildly successful or be wildly unsuccessful, but if someone is consistent during all the cycles, the return could statistically be closer to the mean.
I like a combo of long holding, with 10% to 30% of the portfolio involved in writing covered calls (and pushing out). I think Willcousa summarizes it well - do you take the 10% premium on Intc with the wiggle room of stock price to strike (which these days is 15% due to volatility) for a net of 25%, but at the risk of an upside that exceeds 25% = i.e. > $21. I think it's quite likely INTC will be > $21 in one year (how long can this bear market really last?), so I'm increasingly leaning away from writing cov calls. Majority of strikes are above this price so I don't get called.
RE: " Options are useful for managing risk/volatility."
I tend to see it this way too.
RE: "are the tax status of those selling CCs. Is generating ordinary income on a CC writing better than taking the capital gain? (I concluded "No.")
I disagree. By writing cov calls in this downturn, a person could have 2.5Xs more (after tax) than the guy who didn't, when stock prices recover.
RE: "I concluded some years ago that if I need actual money, cash, there are better ways to get it than by writing CCs on my holdings. For example, margin debt."
That's what a friend of mine is doing to the tune of $20k/mo in interest payments (outrageous) that he's billing to his startup. His margin debt is through Scwab, they seem to be charging a lot in margin debt? Maybe Pottruck is making more money through my friend's margin loan than from being a board member for Intel. : )
Anyway, debt isn't my thing, so margin debt is something I would not want to pursue (even if it were to make better sense.) I prefer leaps. They also play into the volatility.
RE: "The catch is simple: no one knows which direction things are going."
A stock is simply a call option with a premium of zero and an expiry of infinity. You're certainly betting on that call. ; )
RE: "If we knew Intel were to start going up, would we sell calls, even covered calls? No, we would be _buying_ calls and selling puts."
Writing cov calls over a small portion of the portfolio is still a good idea, even when INTC gradually trends up - because you can push the call out. (Though agree it's not ideal.) If INTC shoots up, then that's a huge pain. How huge? Anything over 25% means a limit on profit.
I think INTC is going to be in a bit of a trading range during this Iraq / Bush situation, and then climb. So, in that case, writing cov calls are better than buying a call. But if one thinks the climb will come later on (but before 1.5 yrs), then some leaps added to the mix are okay (as long as a person is willing to risk losing them.)
RE: "for investors paying high marginal rate taxes on the ordinary income generated, I don't see the attraction. "
I think cov calls are better even if you're paying the high tax rate on income.
Especially for a young person who has to do better than 11%/year because inflation/tax has a longer negative impact than for a person in retirement. The best thing for an retired person is some stratified bonds and annuities to pay the base bills with some adequate buffer, and then leaving the majority in stocks, with some writing of cov calls.
But I think your opinion seems more based upon the premise of not rolling calls over, than taxes.
Regards,
Amy J |
