Posted: 3/19/2011 1:54:21 PM EDT
|
I've been reading on using covered calls. The idea sounds good on paper but I've haven't been able to find any stocks with decent option premiums. Is this because the market is trending downward? I did read covered calls were best used in a neutral to slightly bullish market. |
| Covered calls are a good strategy if you understand the risks. Many people will tell you that the risk of a covered call is getting the stock called away. They say this is alright, because if you sold a higher strike than what you paid for the stock you will make money. This is not the major risk. The major risk of using covered calls is the price of the stock going to 0. Do not do any covered calls on stocks you wouldn't buy anyway. The covered calls that produce the highest return also have the highest risk. There is always a reason for high priced calls. I have some experience with covered calls and short puts(both have the same risk profile). It is a strategy that works well in a sideways market. Right now, volatility isn't extremely high, but you can still make some income. Just don't expect to make huge returns right now. |
|
After what happened in Japan, I've been watching utilities that own nuclear plants. Companies like ETR, EXC, SO, and D. These companies already pay a good divided and selling covered calls would add to that. The problem is, so far I haven't seen any with a premium worth selling the call for. I was planning to buy these anyway if they continue to sell off. What stocks do you usually do this with? |
|
I usually short out of the money puts on stocks that I wouldn't mind owning for the strike price because it doesn't tie up as much capital unless I am assigned. Lately it has been kind of hard to find stocks that I feel have a good upside potential, so I have been going with commodity etfs, such as ung and uso.
I don't know much about the stocks you listed, but I will try to help. The question you have to ask, is do you want to make money on premium alone and keep the stock or do you want to make money on the appreciation of the stock. The closer you get to at the money, the more you will make on premium, but the less you will make on appreciation if the stock goes up. You've not going to get much premium for far out of the money calls, but you could sell at the money calls or slightly in the money calls and make 1-2% in 25 days if you sold the APR ones. What is your timeframe? It seems like open interest is a little low on SO and D, so there could be liquidity problems. Of the 4 listed, EXC is the most optionable. It has decent open interest and dollar wide strikes. I'm not saying it's the best company, but it has the best options. |
|
No worries about butting in. I think options are a great thing to learn about. This might be a good place to start learning if my short answer doesn't make sense or if you feel like it is something you would like to learn more about:
http://biz.yahoo.com/opt/education.html Basically, an option gives the buyer a right to either buy(call) or sell(put) a stock at a specific price. The seller(sometimes called writer) of the option on the other hand has to either sell(call) or buy(put) the stock at that specific price. Think of it kind of like insurance - buying puts is insurance against the stock going down because you can sell it to someone at that price no matter what the stock is trading at Buying calls is insurance against the stock going up because no matter what you can buy the stock for the specific price Options have a specific time frame that this has to happen in - anywhere from days to over a year. Options are usually tied to 100 shares of stock. Covered calls are where a person owns stock, and then sells a right to buy that stock at a specific price. For example, if I bought a stock for $10 a share but didn't think that stock would go up very fast, I might sell someone the right to buy the stock from me for $11. If I made $0.50 on this trade, my effective cost for owning the stock would only be $9.50 a share, but the maximum I could sell the stock for would be $11 unless I exited my option position either by buying it back or letting time run out on it. Hope this explains some of it. Not sure how clear that is. Feel free to ask more questions. |
|
safe, non moving stocks don't pay great on selling calls. you want to make money selling calls (i do it every month) you have to pick a stock that swings in prices greatly. I use GNK just for this purpose. I have made enough just selling calls in the last year and a half that now i have paid for the stock itself.
also, if you don't want to lose the stock as the price of it goes past the strike price, just buy to close and reopen the sell to open for another month. at worse it will be a break even and 90% of the time you will even make money, just less. You also have to own at least 300 shares or more to make it worth the trade. I use coved calls on every stock when i buy them just to get the cost down alittle more. YMMV |
|
Quoted:
safe, non moving stocks don't pay great on selling calls. you want to make money selling calls (i do it every month) you have to pick a stock that swings in prices greatly. I use GNK just for this purpose. I have made enough just selling calls in the last year and a half that now i have paid for the stock itself. also, if you don't want to lose the stock as the price of it goes past the strike price, just buy to close and reopen the sell to open for another month. at worse it will be a break even and 90% of the time you will even make money, just less. You also have to own at least 300 shares or more to make it worth the trade. I use coved calls on every stock when i buy them just to get the cost down alittle more. YMMV Do you sell at the money or out of the money? Mostly front month or do you go further out? To make back your purchase price in a year and a half, you've probably been shooting for about 5% or so a month? Have you considered shorting puts? Same risk profile, except less capital is tied up, and you can just keep rolling to further months if you don't want to get assigned. I started out selling covered calls, but then went to short puts. I've just got to be careful about getting over leveraged. |
|
i stay away for short puts.
I usually sell just out of the money. that's why i use GNK, it's a wild ride stock and moves in and out of the money several times each month usually. When the trend is down, I'll buy to close the oringinal contract (usually .05 to .10 $) and resell to open in the same month closer to the money at that day. again, when it moves up through the strike price i just buy to close and sell to open at the SAME strike price or just above my old strike just one month more. my other stocks...aka safer stocks just don't give the play (movement in price) to make it worth my while. i guess it would if you have enough shares. |
|
Quoted: i stay away for short puts. I usually sell just out of the money. that's why i use GNK, it's a wild ride stock and moves in and out of the money several times each month usually. When the trend is down, I'll buy to close the oringinal contract (usually .05 to .10 $) and resell to open in the same month closer to the money at that day. again, when it moves up through the strike price i just buy to close and sell to open at the SAME strike price or just above my old strike just one month more. my other stocks...aka safer stocks just don't give the play (movement in price) to make it worth my while. i guess it would if you have enough shares. Could you explain with some examples of prior trades? Thanks |
|
Quoted: I usually short out of the money puts on stocks that I wouldn't mind owning for the strike price because it doesn't tie up as much capital unless I am assigned. Lately it has been kind of hard to find stocks that I feel have a good upside potential, so I have been going with commodity etfs, such as ung and uso. I don't know much about the stocks you listed, but I will try to help. The question you have to ask, is do you want to make money on premium alone and keep the stock or do you want to make money on the appreciation of the stock. The closer you get to at the money, the more you will make on premium, but the less you will make on appreciation if the stock goes up. You've not going to get much premium for far out of the money calls, but you could sell at the money calls or slightly in the money calls and make 1-2% in 25 days if you sold the APR ones. What is your timeframe? It seems like open interest is a little low on SO and D, so there could be liquidity problems. Of the 4 listed, EXC is the most optionable. It has decent open interest and dollar wide strikes. I'm not saying it's the best company, but it has the best options. For these I was looking to make money on the premium and keep the stock. If I sold at money calls the option would most likely be exercised right? so my profit would be the premium plus a small appreciation? For EXC I was looking May 11 calls @41 the premium is $1.12, the share price is $40.91 right now. If I understand this correctly I'll make about $336 less commission selling 300 covered calls. My only downside risk is if the share price drops. |
|
Quoted:
Quoted:
I usually short out of the money puts on stocks that I wouldn't mind owning for the strike price because it doesn't tie up as much capital unless I am assigned. Lately it has been kind of hard to find stocks that I feel have a good upside potential, so I have been going with commodity etfs, such as ung and uso. I don't know much about the stocks you listed, but I will try to help. The question you have to ask, is do you want to make money on premium alone and keep the stock or do you want to make money on the appreciation of the stock. The closer you get to at the money, the more you will make on premium, but the less you will make on appreciation if the stock goes up. You've not going to get much premium for far out of the money calls, but you could sell at the money calls or slightly in the money calls and make 1-2% in 25 days if you sold the APR ones. What is your timeframe? It seems like open interest is a little low on SO and D, so there could be liquidity problems. Of the 4 listed, EXC is the most optionable. It has decent open interest and dollar wide strikes. I'm not saying it's the best company, but it has the best options. For these I was looking to make money on the premium and keep the stock. If I sold at money calls the option would most likely be exercised right? so my profit would be the premium plus a small appreciation? For EXC I was looking May 11 calls @41 the premium is $1.12, the share price is $40.91 right now. If I understand this correctly I'll make about $336 less commission selling 300 covered calls. My only downside risk is if the share price drops. You are correct that the downside risk would be the shares falling. By selling the call you would lower your price per share to 39.79. If exercised, you would make 1.21 per share less commissions which would be about a 3% return in just under 2 months. If not called away, then you could let the contract expire and sell more calls later out. As a previous poster said, if EXC goes over 41 and you don't want it to be called away, then you could simply buy back your calls and sell calls further out. |