Covered Calls

By hd123sftail, March 8, 2012

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

After reading about covered calls I really am becoming interested in giving it a shot. My problem is identifying stocks to try this on. I don’t have a large account so at best I can only buy 1 or 2 options. When I look at the premiums they barely are large enough to make any money. How do I search for higher premiums till I can build up my account? Any advice is greatly appreciated.

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5 Comments on " Covered Calls"

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Travis Johnson, Stock Gumshoe
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4828
March 9, 2012 12:26 pm
This definitely works better as an income investment when volatility is high (volatility as reported by the VIX index is really just a measure of the premiums being paid by options traders, which implies what kind of volatility they expect from the underlying stock market), but there is certainly risk if you reach for the more volatile stocks that give you higher payouts — because you can easily catch a capital loss from a falling share price that more than clobbers your income from selling the call. I dont’ do covered call selling very often myself, but folks I know… Read more »
profmad
Irregular
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profmad
March 10, 2012 12:41 pm
The opportunity cot of covered calls is that one sells the entire upside above the strike price. For example: I own MITK at 9.30. While it was hovering between 7.5 -8.00 I sold a covered call with strike = 10 maturing 3/17, thinking it could hardly rise much above that. Well, after announcing earnings two weeks back, MITK’s now trading north of 11.5. I hate when that happens. However, I’m not going to try to roll it over, as I think the stock is over-priced and has to correct. I shall be out above my purchase price but will have… Read more »
Bob
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Bob
March 13, 2012 1:41 am
As Michael Adler has pointed out you give up any upside beyond the strike price when you sell covered calls. A perverse selection effect takes place where the good stocks get called away and the crap stays in your portfolio. I sometimes cynically think that the one way to make a stock I own go to the moon is to sell near the money covered calls on it. Keep in mind that the trick of buying high dividend stocks and selling covered calls on them doesn’t work as well as you might hope because calls get cheaper (and puts more… Read more »
profmad
Irregular
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profmad
March 13, 2012 2:57 pm

Let me ask Bob a question about his last sentence. I agree the equivalence when the put is 100% cash secured. But what happens when the put is sold in a 20% margin account? At this point I get confused.

Bob
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Bob
March 20, 2012 5:52 pm
Selling puts in a margin account simply means that you need less cash in your account, because only about 20% of the cost of buying the stock at the strike price must be kept aside. At that point it’s not equivalent to a buy/write in that the buy/write requires more cash (you need to pay for 100% of the shares, not just 20%, or at least 50% if you are buying shares on margin). (In option theory the buy/write is still equivalent to selling puts on margin, because they imagine a penniless trader who borrows every cent of his trading… Read more »
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