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Strategies & Market Trends : Covered Calls
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To: Zach E. who wrote (50)5/12/1998 3:31:00 PM
From: Herm  Read Replies (1) of 86
 
Thanks for the food for thought Zach!

I'm a visual learner myself. That numbers for implied volatility just don't make me realize the outcome. Show me a chart any day like the one below! Just set to interactive and select the slow volatility indicator for the lower chart. You will see as the volatility increases versus the movement on the stock price. After a while it becomes a CCers sixth sense.

bigcharts.com

You stats seem to build a case toward CCing rather than straight CALL buying. Those folks that have done this for a while know from experience that CCing allows us to keep the premies and the stock the majority of the time. :-)

The covered call writer could use implied/historical volatility data as another instrument to based the decisions. But, that IV does change every week or so for every stock. If one already owns several stocks in a portfolio it is not likely that the person would switch in/out of additional stocks just to CC. In fact, most people will wait and look for an opportunity for the stock price to increase before CCing. In other words, most of the time we try to make as much profit as possible in capital appreciation plus the CC premies until we get called out! Usually, we can tell that the premies are juicy. That volatility of course is that third dimension in the pricing.

Now, consider this! You have heard me often suggest to write CCs at or in the money when the RSI and BBands are high. The reason is that the price right before the stock price pull backs (raised the volatility factors) and when the price drop comes suddenly the CC premie erosion will be magnified. Thus, your stock net cost basis will be cushioned by the larger than normal premies you collect. That is the difference between a casual CCer and an aggressive CCer that exploits implied volatility to thier advantage.

Thanks for your information.
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