Mark's Runaway Covered Call Philosophy Diatribe (Long):
Herm,Steve and Thread,
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DISCLAIMER: The following diatribe is intended for the sake of intelligent conversation and education. No criticism or malice is intended. I offer the following in an effort to better educate myself and others in a similar position. Intelligent opinions and/or arguments are welcome.
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Bill Kovalick said:
"one of the trickiest things with this bizness is judging when the stock has hit
a near term peak (sell point). Recent example: a couple weeks ago, I sold the
Sep 37.5 calls on AMD when it spiked up a few points. I felt pretty good
about this until the next day when it jumped $5 ! (due to news about IBM
coming onboard). Now, AMD has pulled back considerably since so this may
work out fine but I sure felt like a dufus after the $5 surge."
I found myself in the EXACT same boat as Bill. Yes, today I was able to close out my position without raising my cost basis; but since I wrote those calls I've spent 2 weeks scratching my head about this.
It's one thing to write CC's on a stock with "normal" movement and volatility within say 3 or 4 points up and down. But writing CC's on a stock with an expected or unexpected major surge is turning out to be a major pain. My repairs on EGRP were abruptly interrupted by an uncharacteristic surge. Now before you start quoting McMillan Repairs chapters or Steve's Strategy; Yes I've read them, appreciate them and understand them. But here's my problem:
As I see it, <if my net cost basis is still near the current stock value>,
I don't stand to make much by getting called out. <For those of us who can't afford to trade in the thousands of shares>, a profit of a point isn't much. While some may make thousands on a 50 cent move, a small cap guy like me won't even blink over it.
Rolling up and out will certainly allow me to hang onto the stock, but at a static or increased cost basis. If I've gone a month with no profit (or cost basis increase), that's a complete waste of time/money! Yes, I could then sell calls for the following month out, but then aren't I just compensating for profits lost in the previous month? And in the case of AMD, the next 4 months seem to have so much runaway potential, that rolling up and out would likely put me in the same runaway position all over again. So I would go thru the same rolling up and out cycle all over again. Frankly, I hesitate to write cc's on AMD for awhile.
It seems to me that on stocks with runaway potential, wouldn't it be most prudent to suspend writing of cc's until the stock price peaks or stabilizes? This way, us small cap guys wouldn't sacrifice the upward potential, and could resume writing cc's when things have settled down.
Remember, that the above only applies to runaway situations; I have no problem with writing CC's on "normal" stock movements.
I welcome your observations and insight.
Best regards,
-Mark |
