Mark
I would like your advice on a covered call position that I have.
At the April expiration I sold an FXI June 156 call for a premium of $6. At that time FXI was trading around 145 so what I sold was an OTM call. Over the next couple of weeks
FXI shot up and is now trading around 157 and the option is trading around $9.80. My intention is to own FXI in the long term as it is part of my asset allocation plan which I intend to maintain. To stick to my asset allocation strategy, I will buy back my holdings in FXI if I get assigned in June. A reasonable plan.
I don't necessarily like the situation I am in because I will not participate in any further upside movement of FXI unless I change my position.As you note below, you do participate - up to the 162 level. I have (in moments of weakness) thought about buying back the position and selling a further OTM call. That being said as the FXI Jun 156 is almost ATM right now I will be paying dearly in time premium to buy it back, so this likely not be a smart thing to do. Yes, time premium is at it's highest. If you really want to write covered calls, then you must accept the fact (as you apparently do) that you cannot achieve the maximum result every time. This may or may not be one of those times. Unless you decide that you are very bullish right now and simply MUST be long this ETF, waiting is your best best. You could roll, but I'll get to that below.
My gut feel tells me to do nothing and wait and see (I am ambivalent about the direction of the market and I don't want to get into market predictions Ok. Maintain that attitude and you will do well over the longer-term. There is no rush to do anything with your position right now./ timing). My thought is
that if FXI goes down sharply, then I would not miss any upside, and if FXI goes up sharply I can wait until it is about 5% OTM and then buy it back and roll the position
(obviously this will cost me putting in additional cash into this holding). You should not be forced to put additional cash into the investment. in fact, the vast majority of people who roll positions take in an additional cash credit. For example, you could cover your short call and sell Aug 159 and collect s small bit of cash. I do not recommend this (at this time) because (as already noted) time premium is high for the June ATM call and more importantly, IV is at low levels. The August premium is very responsive to changes in IV, and if you sell when it's lower, rolling costs more money. By waiting, you gain time decay in the Jun calls - unless the ETF surges. If IV goes lower, not so good for the roll, but if it goes higher, you'll prefer to roll then. All in all, based on your comments, holding seems best at this time.
All this being said my comparison for success in terms of my investment objective is to beat a buy and hold strategy, and in the case of this particular covered call I would still beat buy and hold as long as FXI finishes on June 20th at less than 162; strike price of 156 + $6 premium, (This is not meant to imply that I feel I must beat B&H on every covered call I write, my goal is to beat B&H in the long term). But then again June 20th is a long time away and I stand the chance of missing out a big rally. EVERY TIME you write a covered call you face that risk. CCW gains most of the time (compared with buy and hold) but if it didn't lose part of the time, there would never be any buyers for the calls you write.
Would love your thoughts and feedback. Am I thinking things through correctly? Yes. You have a firm grasp on the principles of this strategy. Now the question is: can you DO what you believe is correct, or will your emotions get in the way? Emotions are not always 'wrong' but you know the risks and rewards of this method. If those don't suit you, there are alternative strategies. Do you have any suggestions? I don't believe you need any. Sounds as if you are in good shape.
Regards
TR
Mark
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Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options