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

To: Uncle Frank who wrote (1271)	6/30/2001 9:31:56 AM
From: alanrs	Read Replies (2) \| Respond to of 5205

The seemingly fat premiums make it tempting to write 3-4 month expiry calls I think it's a little more complicated than that, in that what makes sense in one portfolio may not in another. I embarked on this experimental year of writing calls based on a very fortuitous, but random event (a post by you mentioning .VLMAT in passing) purely out of curiosity. As such, I am working with a portfolio of 8,000 optionable shares of one thing or another, all bought without any regard to options. At any given time I find that at least 2/3 of them are unsuitable in any time frame. Since I am not willing to write calls against all of any one stock, this limits the amount of contracts further. I did a summary of the year and have been involved in 39 completed transactions representing 71 contracts. This averages to 1.8 contracts per transaction. My average gain has been $423 per transaction, or $234 per contract. My average holding time is 24.7 calendar days. My success rate has been 100% (no buy backs at a loss, no stock call yet). To duplicate this with only front month calls would have required an average premium of $240-$250 with a strike high enough so that the option expired worthless. I have not found these premiums on OTM leading month calls for most of the stocks I own. My objective in all this has now become finding out if I can replace my working income ($65k) by doing this. I plan on putting a new 50k to work in a separate account were I can choose stocks specifically for their optionability, try out other strategies, maximize percentages, not worry about getting called, in short, more aggressively pursue this avenue. (I may even read a book on the subject, although the posts here are probably good enough). I look at the last year as mostly cherry picking. I also tend to personalize my strategies, rather than getting too caught up in math theory. I can see where a larger portfolio would allow selling contracts in multiples of 10, without regard to transaction costs, for smaller absolute premiums. When my 8,000 shares turn into 80,000 I will attempt this. There is no doubt that the percentages are usually better in front month options. ARS

To: Uncle Frank who wrote (1271)	6/30/2001 5:32:45 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

Uncle Frank, You make valid observations about the decay rates of time premium favoring near term calls. The math is indisputable. But I don't see how that leads you to your conclusion: The problem as I see it is that dips in the price of the underlying don't affect a cc with 3-4 months remaining on it very much. To my way of thinking, the danger of the stock "getting away" from you (going deep itm) is much greater on long calls. That's why I've stuck with front monthers. The first sentence is correct. Mid term option prices are more stable than near term in the sense that "delta" canges more slowly. So if you start off with ATM options with a delta of near 50%, the mid terms will stay closer to 50% as the stock moves than the near terms. Conversely, the near terms changes faster, which means that if the stock goes up you reach the point of making no additional gain faster (getting away), and if it goes down you reach the point of where the call is almost worthless faster. To my way of thinking, the danger is greater for the near term calls. I think that alanrs is correct in observing that it is a bit more complicated than just comparing time premium per month, and that is especially true when you start looking at OTM calls. Many call writers are not content to write ATM because that eliminates all potential gain from a rising stock price. OR, once a stock has moved so that the written calls are no longer ATM, the situation becomes different in that the time premium of the call represents a relatively small portion of the potential gain of a cc position. When that happens, the rate of change of time premium becomes much less important, and the stability of the time premium for the mid term calls is advantageous. Under a certain set of circumstances, you are right that near term calls afford the best payoff. IMHO those circumstances are when you write near ATM calls and the stock does not move very fast of very far from month to month so that the time premium is a dominant fraction of the overall gain (or loss). In other words, it is best for low volatility stocks. In what seems to be more common with the majority of stocks these days, relatively large moves in relatively short times, the gain or loss becomes dominated by the move in the underlying and the mid term options are preferable. A few experiences of having a stock move 20% to 30% in a few days after you have captured a 5% or less time premium for a near term call tends to make the longer term options a lot more attractive. It's just another opinion, and differences of opinion make the world go round. Dan