Monday, August 31, 2009

Re: [TheOptionClub.com] covered calls

 

carolinaspring66:
If someone already hasn't directed you to the following Yahoo Group, I strongly suggest that you join this group and spend a LOT of time reading through the archives. Once you have done so, you will find the members very willing to answer any questions you have.
 
 
Bob
 
----- Original Message -----
Sent: Saturday, August 29, 2009 2:59 PM
Subject: Re: [TheOptionClub.com] covered calls

 

Carolinaspring66,
 
  I apologize for not responding to this question in a more timely fashion. I wanted to have the time to give an adequate and hopefully well thought out reply.
  Most of us realize there is no "one size fits all' when it comes to option strategies. There is no one strategy that is suitable for all market conditions. Likewise, there is no single, right way to apply an option strategy that is appropriate for all situations. The trick is choosing the correct strategy for the current market conditions, as well as, the best way to apply that strategy considering the current conditions. The time frame of the intended trade period will also influence your choice of strategy. A strategy that is a good choice for the next few days or this week, may not be a good choice for the month or year. Whether we are willing to give up the stock or wish to hold it longer term will influence our choice of covered call application methods. We also need to understand how, when and why our chosen strategy can be or, should be, adjusted or morphed according to changing market conditions. From my experience with other traders, I find that traders choosing the covered call strategy, either understand options and the CC strategy, or they have been given the impression the CC strategy is an easy and safe strategy to use.  The first group knows how and why they are using the strategy. The second group should get their money out of the market until they get a much higher level of option and trading education. The covered call strategy is a HIGH RISK, limited reward strategy. That's not to say it does not have a useful place in the world of option trading, just that you better know what your doing before using it.  
  There are a number of specific reasons traders choose to use covered calls.  Generally these fall into two categories. One, as a limited hedge and two, as premium collection. Without knowing your outlook for the market or the time frame of that outlook, it is difficult to give advice on your application of the CC strategy to SPY.  I can see some value to selling, in the money covered calls as a hedge on a SPY position, that is, under certain circumstances. This approach depends on your market outlook. Selling an ATM call would be in line with a mildly bearish outlook. Selecting an ITM call indicates a stronger, bearish market outlook. I can not argue with that outlook, at least in a short term time frame. Based on my technical analysis last Monday (8/24), I sold a slightly  ITM hedge on a long term bullish position. That move has not proven necessary so far but, I have not regretted having a little insurance on this position during the past week. I'm aware we are still in an up trend and I'm prepared to buy back my short call, if needed. As far as selling one month out, maybe that just suits your personal trading style. Looking at your CC trade as a hedge, I only have a mild objection to that choice. My personal preference is to sell front month calls. That way I get a little more benefit from time decay.
  Now, looking at your position as a premium collection strategy, I'd say you are off base with your approach. If your main purpose for using the covered call strategy is premium collection, I'd recommend selling front month, ATM calls. This is where you benefit the most from time decay. As a premium collection strategy, it is time that your are selling and profiting from.
The best market for this application is neutral to slightly bullish. In a more bullish market you could select an OTM call. This would allow you profit from any possible increase in SPY price. You're return will be improved, but your upside potential is still limited.  Selling ITM calls in an up trending market, for the purpose of collecting premium, does not make much sense to me.
  As I mentioned earlier, there are situations where the CC is useful. However, it is not a strategy that should be a "first choice" or a "one and only" strategy, month in and month out. Knowing a variety of option strategies and the proper application of those strategies allows you, in almost all cases, to make more profitable trades at a lower risk while tying up less cash.
 
                                                                                                     Dave  


-----Original Message-----
From: carolinaspring66 <spring@bbnp.com>
To: OptionClub@yahoogroups.com
Sent: Thu, Aug 20, 2009 9:27 pm
Subject: [TheOptionClub.com] covered calls

 
I have been doing covered calls on SPY,SELLING IN- MONEY CALLS ONE MONTH OUT.I know I have alot to learn.Could someone give me some advice?

THANKS

__._,_.___
The goal of TheOptionClub is to provide a forum for members to work together for the purpose of furthering our individual understanding option trading.  All messages and postings, and any materials circulated are provided for discussion and educational purposes only.  No statement contained in any materials from TheOptionClub should be considered a recommendation to buy or sell a security or to provide investment, legal or tax advice.  All investors are encouraged to consult a qualified professional before trading in any security.  Stock and option trading involves risk and is not suitable for most people.  There is no guarantee that any information provided is accurate and, may in fact, be wrong.  It is understood that the participants in TheOptionClub have varying backgrounds and degrees of experience in option trading, and that regardless of experience each member is considered a student.  As such, any information distributed through TheOptionClub should be considered with a critical mind and not relied upon as an authoritative source.

To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.com
Recent Activity
Visit Your Group
Give Back

Yahoo! for Good

Get inspired

by a good cause.

Y! Toolbar

Get it Free!

easy 1-click access

to your groups.

Yahoo! Groups

Start a group

in 3 easy steps.

Connect with others.

.

__,_._,___
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)