Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Strictly Buy and Sell Set Ups -- Ignore unavailable to you. Want to Upgrade?

To: Bob V who wrote (2562)	3/3/2005 1:12:36 AM
From: profile_14	Respond to of 13449

Bob, Historical daily charts on options and quote histories (time and sales) I only know how to find using the Bloomberg proprietary terminals, which are available through a very expensive annual subscription on also proprietary hardware. The point you make about selling a covered call intraday is reasonable, except for the following: 1. The spread between the bid and the ask on options varies greatly depending on the liquidity of the stock and the strike price. For example, in the best case scenario, the spread might be five cents. I typically see spreads between 10-20 cents, and at times, as high as 50 cents. Sometimes when you are trading index options, spreads can be as high as 4 dollars. Therefore, the stock option has to move beyond the spread intraday for you to begin to make a profit. That spread move will be at least as great in the underlying stock. 2. Commissions on options are greater than commissions on stocks. If you are trading the stock and going short via a covered call to capture the downside, you might as well day trade the stock. You will keep a greater portion of your profits via lower commissions and reduced spreads. 3. Writing covered calls can be an effective strategy, as you win in two out of three scenarios. You win when the stock is flat and when it moves down in price. You win when it is flat because time decay reduces the value of the covered call time premium, making it cheaper for you to buy it back. Time decay is greatest during the last two weeks preceding expiry. There are a couple of ways to play your covered call strategy. First, if the stock has had a large run and you anticipate a pullback, but do not want to outright sell the stock that day, you might consider selling at the money calls, or slightly in the money calls. If the stock pulls back, those will lose not only time value but hopefully what is left of its intrinsic value. Second, you can also choose to write out of the money calls after a large run up suggesting that you do not believe the price will exceed that strike by expiry. You collect a small premium, but the value rapidly declines also with time going by and any pullback or reduction in volatility. Depending on the stock, volatility can generate a healthy premium (eg., TOL or AAPL) and a source of incremental income. Something of interest is that the sum of two monthly sequential calls written is bigger than the call for a 2-month period. Check it out, so it pays to write them twice. You ask about the downside... Well, the downside is you miss any big run. You make small amounts along the way and the day the stock moves, your options preclude you from making that windfall. If you do not cover your option before it goes beyond your strike, the delta becomes 1, and then your stock gains are negated dollar for dollar by your option losses. You can buy back your calls and then sell the next month or two forward (this is called rolling your options). In that case you buy for x but sell for y in a forward month which is greater than x, capturing more time premium and alleviating some of the stock price upward movement that has made your short call more expensive. You are betting against yourself in a way when you write a covered call. Also, a buy-write strategy can be replaced with a simple put. One trade and one commission, versus two trades and two commissions. Think about it for a second. Writing calls is good as long as you can forecast where you might want to sell all or a part of your position. You can always get back in, but then you have to risk having to chase a stock or wait a while to see a lower price. That's my humble opinion, of course. Best regards,