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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 (410)	5/3/2001 12:37:14 PM
From: BDR	Read Replies (1) \| Respond to of 5205

Two thoughts: <<I lost a tremendous bundle during the recent crash but I'm way ahead on the options and I think both of those are true statements for most of us.>> Recent events may be coloring our view of the investing world. Many of us have lost money in the past year and we are all probably kicking ourselves for not doing more to preserve our earlier gains. Given that we were not so prescient as to sell at the top, what tactic is readily available to preserve capital and yet still earn a modest return if the market doesn't fall? Covered calls come to mind and deep in the money calls would have been great plays from mid-2000 to now. However, would any of us been very interested in a tactic that preserved capital but limited growth in December 1999? Not me. As dUF said in another post, I was bullet proof at the time. Our recent experience in the market may be making us feel much better about covered call writing than we would at other times. <<Why is it so relatively easy to make money with options at the present juncture? >> I think recent volatility* coupled with a leveling off of the decline in stock prices have combined to make covered call writing particularly lucrative. Volatility drives up premiums. Now that my stocks have stopped losing 20% a month in value, writing calls with high premiums against those positions seems particularly rewarding. Although I was making money on the calls I sold for the first three months of this year, overall I was losing money. Writing covered calls just meant I was losing it slower than somebody else who didn't. High volatility and a sidewise market are ideal settings for covered call writing in my limited experience.But, if the NASDAQ continues rising 30% a month, this thread may die because simply holding the stock may be more profitable again. It hard not to invest using the technique that made money for you most recently, even if conditions change. dDR *There is volatility and there is the VIX. Volatility: A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns. e-analytics.com Volatility, especially for the NASDAQ has increased in recent years. VIX: "The VIX is calculated by taking the weighted average of the Implied Volatility of 8 OEX calls and puts with an average time to expiration of 30 days. As such, it measures fear and optimism as manifested in OEX options activity. When large numbers of traders become fearful, the VIX reading rises, and when complacency about the market reigns, the VIX reading falls. And since the vast majority of put/call buyers are wrong and lose money, it's usually a smart move to fade (go counter to) what the VIX says the the crowd is doing. " decisionpoint.com Plot of the Volatility Index (VIX): stockcharts.com[w,a]daolyymy[d19980101,20010503][pb50!b200][vc60][iLa12,26,9] One can see the fear building up to October, 1998, and the smaller spikes in April 2000 and 2001. One can also see the complacency that existed in early September, 2000. My portfolio reached its all time peak value the first week of September and I was fat, dumb and happy then, yes sirree. Short term there has been a drop in VIX but there has been slow rise in the moving averages since last September. Warning: reader must assume that I know squat about technical analysis. For predictions of the future, readers are encouraged to consult their own Tarot card reader.

To: Seeker of Truth who wrote (410)	5/3/2001 2:59:25 PM
From: EnricoPalazzo	Respond to of 5205

In other words maybe the CC tactic is best for a sidewise market and actually inferior for a straight up market? Ardethan's statistics are counter to what I'm saying. Not necessarily. Just as we never had a market go straight down in the 90's like it did recently, it's quite possible that this year will be straight up in a way we've never seen before. The most dangerous part of back-testing is a false sense of security (someone should have told that to Merton & Scholes <gg>). CC is definitely inferior to straight holding in straight up markets--my strategy underperforms if the increase is > 10% + premium%. It just appears that on average, straight ups don't happen that often (I think that even CSCO went up > 10% "only" about 30 months out of 120).