Herm,
I am really glad that you responded in depth to NateC (Roger's) inquiry about CC'ing out 2 or more months. I too have thought about this a lot. Before I respond point-by-point to your comments I would like to qualify things a bit. I have hundreds of real-time day trades under my belt, using TA as a guide for entry/exit, etc. I have the luxury of being able to do my work at home, while I have a real time streamer up and running on the screen. I love to trade, but decided that going head to head with the MMs in day-trading was a losing proposition. I have limited capital, and have to stay (for the time-being) in the low priced stocks. Your WINs strategy, and McMillans recovery techniques have taken the downside fear out of CC writing for me, to which I owe you great gratitude!
1. Larger CC premies at one time!
Yes, there are larger premies for months that are further out. However, if you look at CCing as a means of gaining monthly income, either to pull out and use to live on, or as a means to reinvest, and if you set your spreadsheet up to calc monthly return, you will find that you will give up 1 to 3% ROI per month, for every month you go out. In addition, the ability to compound your gains increases with the shorter period, and the larger income per month, from the closer writes. Just because you write a cc, and get a premium, does not mean that that cash is “released” to use somewhere else immediately. You may very well need it back to simply protect your position until expiration date.
2. Much more downside protection!
For me, this has little meaning. I think you have to take corrective action when you see it happening, or have stops in place to do it for you. I don't care if I have an extra 5/8 of protection when I see a stock tank from 12 ½ to 5 ½, and then bounce back up to 8, all in one day. If I miss the average down… buy back the call…write a new one…and sell my protective put operational sequence, then having an extra 5/8ths of premium isn't going to matter much.
3. More capital to buy defensive sideshows!
I see defensive sideshows as a cost of doing this business. I don't really see a relationship between buying insurance, especially if you leg into to it, ala Steve's method, and when you write your call for. In fact, if you stick with shorter duration covered calls, you insurance puts will cost less, since you will be matching the shorter CC period. I think it's a wash.
4. Large CC premiums offset margin interest!
Two points here. First, I use the same argument as above. Margin interest is a cost of doing business, and needs to be factored into your ROI. The shorter the period you use margin in any position, the less the cost to the position. Second, any CC is carried in your account as a short position until it expires, thus seemingly reducing your margin capability in direct proportion to the current premium on the option. You only really gain margin buying power as the premium begins to fade as you approach expiration. The brokerage firm is interested in your liquidation value for margin, not how much cash you put into the account right away from premiums. At least, that seems to be the way Ameridump looks at it. I might be wrong here, since their margin calcs are always 2 to 3 days out of date, and often wrong anyway.
5. Less trading Commission!
Just another cost of doing business against that monthly ROI. It is included in my calcs. Also, I use discount brokers, which seem to cost less than DLJ.
6. Less trading Transactions!
I love to trade. Also, I cannot imagine anyone doing WINs, or any kind of trading strategy, without a solid understanding of TA and fundamentals. You had flat better have a lot of skill in anticipating which way, and how far the stock will move, or you will lose your shirt, ala Wade Cook, in a quick hurry!
7. Who said I'm going to wait until Expiration!
I think you have a great deal more flexibility to roll your cc in just about any direction when you have a premium to buy back that is dying quickly, versus one that stays stubbornly at, or above, your CC write premium, no matter what the danged stock does. I do agree that sideshows that make sense are much harder to do with shorter option durations. In fact, I think option sideshows should be reserved for those who have a heck of lot more knowledge about pure options trading than I certainly have right now. CCing is simple compared to trading pure options. Just an opinion, for now. No factual basis except a couple of losing positions.
I would also like to add that getting to another decision point quicker in the series of transactions that make up CC writing gives you a chance to re-evaluate, to sell the stock and to trade into another, better position, or to do repair work quicker.
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