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

To: holland who wrote (2428)	9/20/2001 8:39:51 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 5205

Keep in mind that the covered call strategy is for flat or slightly rising markets hear hear. the only problem is, the market doesn't send you a telegram in advance telling you what the market will be like over the duration of your call write. and usually tanking markets are proceeded by flat or rising markets. i was on here a while ago explaining what i disliked about CC strategies, as i noticed people seemed rather lulled into complacency by the calm before the storm. i repeat here some of the points i made then: #reply-16230365 the thing i don't like about covered calls, in the context of certain nonexistent, hypothetical investors who think they're diversifying their portfolio by, for example, adding a storage "gorilla" and a back-office software "gorilla" to their wireless "gorilla" (with a portfolio weighting of 33% each!), is that CCs can get people thinking bassackwards about what "conservative investing" means. that is, they sell CCs to make "easy money" and they think their "risk" is that they will get called out at a strike price on certain hypothetical equities, which could be trading at high multiples of rather specious earnings and sales. such hypothetical persons might fill their time worrying about "repair strategies" and such. to me, this kind of CC selling is problematic on two levels: Level I: Tactics (the nitty-gritty of doing call writes well) when one even talks about "repairs" in the selling of covered calls, this sounds to me like "psuedo-naked calls". that is, the call writer really doesn't want to part with the stock, and is thus in an effectively similar situation to the naked call writer (outlier cases excepted), but at the same time relies emotionally on the "safety" of the calls being covered to avoid taking other, more deliberate (and costly) hedging steps (e.g., credit spreads). because of the emotional "safety" factor, one may get careless in writing the calls (moreso than a true naked writer [which may or may not describe my immediate capacity, LOL]) under the "what's-the-worst-that-can-happen" theory; even though, should the stock soar, one is likely to try a messy "repair" job which is surely a nasty shot in the foot. in my opinion, a covered call should not be written unless one is willing to be called out. that doesn't mean there couldn't be some adjustment, such as buying back for 1 dollar a call one has sold for 5. but if one ends up buying back for 15 what was sold for 5, then this sounds more like a "pseudo-naked call" to me--and that's not effective on a tactical level. Level II: Strategy (Investment Policy) perhaps the more serious problem, for the abovementioned hypothetical type of investor, is that he may end up barking up the wrong tree. that is, while the majority of his energy would best be spent getting the "big picture" stuff right--that is, choosing and implementing a prudent asset allocation policy--he may have completely overlooked this important practice. call premia have come down quite a bit anyway, and on a monthly basis they are very trifling compared to portfolio value. if one gets caught up trying to bag 3-5% a month on CCs but in the process loses 60% in a falling stock market, then one has put the cart before the horse.