>>>I always, always, write short dated options<<<
Your arguments are well taken and structured.
I also tend to write short dated options for two reasons: 1) the decay rate of the time premium is much greater than for long dated options, and 2) I usually hold stock for a cap gain but sell the options as a hedge and a small amount of income. I never want them to go into the money (I know, I know - I am a pig and will have my cake and eat it too), but if they do I usually have a cap gain yielding an extraordinary annualized gain - only relevant if you can keep finding such marvelous trades.
WRT my current CNQ position, this is one time where I got caught with a lead off of first and the stock went deep into the money - think I sold the May $60s when the stock was maybe $58, and then rolled sideways into the June $60s for not a small chunk of additional time premium - knowing full well that there would be a pullback in June. Of course CNQ has gone to $69 in the interim. There is no telling if I would have sold at $69 if I had remained unhedged.
When I rolled out to December, I also rolled up by $5, so I will have an additional $5 cap gain should I be assigned then. It isn't a bad trade, unless of course the roof blows off and CNQ goes to $100 - which it will in the next few years.
If it starts flying, I will no doubt buy some deep ITM calls to recoup the profits I "would have had" absent the hedges.
There really is no right or wrong way to use options. By getting the cash in hand up front, you always have it to buy them back later - sometimes at a loss, sometimes for a gain. I try to make it my practice to never look backwards on a trade - where did I enter, how much premium did I collect to buy the puppies back, etc. There is only the future. Still one's account has grown a little fatter by having the option premium cash in hand, and thereby one is able to take on a little more risk going forward. |
