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Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: Seeker of Truth who wrote (393)	5/2/2001 11:00:03 PM
From: FaultLine	Respond to of 5205

maybe, just maybe, the expected return from selling calls on less volatile stocks works out to be the same as that from selling covered calls on the more volatile stocks when we include the possibility of loss on the underlying stock. Indeed, that could be true. I personally do not know how to evaluate that but I'll keep my eyes open for some reference to that issue. This is an interesting question because it directly relates to risk-selection. --fl

To: Seeker of Truth who wrote (393)	5/3/2001 10:45:51 AM
From: BDR	Read Replies (1) \| Respond to of 5205

<<I have no statistics but maybe, just maybe, the expected return from selling calls on less volatile stocks works out to be the same as that from selling covered calls on the more volatile stocks when we include the possibility of loss on the underlying stock. >> Calculating returns for covered calls is a useful exercise in my opinion but can be misleading because the assumption is always that the stock is above the strike price at expiration. That is, of course, not guaranteed. As with most investments, higher returns come with a higher risk. We haven't discovered a source of free money. Whether returns even out in the long run or whether the higher risks will prove worth it , I don't know. I think the same principles that are used in building a portfolio of equities should be applied to writing covered calls. High risk, speculative plays should be only a small part of the portfolio. Lower risk, steadier performers should make up the majority of holdings.

To: Seeker of Truth who wrote (393)	5/3/2001 2:05:36 PM
From: BDR	Read Replies (2) \| Respond to of 5205

I am still struggling with the idea that you brought up that returns may end up being the same for calls with high and low premiums because of the difference in volatility. At first I thought that might be the case. But I don't want to confuse volatility with risk. For someone committed to holding for the long term risk is important but volatility is not. Volatility can be a problem for short term traders. But is that a problem for covered call writers writing short term options? I am thinking out loud here and haven't really resolved the matter to my own satisfaction. Clearly volatility provides richer premiums and, if you buy a stock that you are comfortable holding long term if you are not called out, aren't you getting the best of both worlds? If you are called out volatility increases the chances that you can buy back in at or below the price you were forced to sell at. Or is my thinking all wrong? dDR