What can I reasonably expect?
What can I reasonably expect?
Mark, Thanks for your sensible approach. I have done a fair amount of reading over the past month on covered calls. Something my mother said about ... :"if it seems too good to be true..." That having been said, the math seems to suggest that this is a prudent method to enhance returns. What can a average person, with reasonable coaching and competency, expect in the way of monthly returns? Also, is there a way to use stable, blue chips to generate covered call income...or must one use volatile stocks? Thanks and Regards, Mark Hello Mark, I agree. Covered call writing is a prudent method to enhance returns. It's not too good to be true, because there are risks involved. Just be aware that it's a bullish strategy and thus, offers only a modest amount of protection against losses in a falling market. And it does limit your potential profits. This strategy is not for everyone, but I do like it, especially for people who are first learning about options. You question is answered by your own last sentence. There is no reasonable method for estimating a 'reasonable return.' Here's why:
1) Stock selectionThe bottom line is that your potential profits vary significantly depending on which types of stock you choose and the strike prices you choose. Thus, there is no 'reasonable expectation.'
However, you can establish your own goal. When I was writing covered calls exclusively, I aimed for 2-3% per month. Most of the stocks I chose were more volatile than blue chips, but they were definitely not very risky and were not very volatile stocks. I also wrote call options that were slightly in the money (ITM) and never tried to make big returns by writing OTM calls. My goal was to get additional safety, rather than additional potential profits. Your investment style may differ and you may prefer to give yourself the chance to earn higher returns. Nothing wrong with that. It's the normal situation in the investment world - take higher risk and you have the chance to earn higher rewards.
I strongly suggest owning positions in stocks that allow you to feel comfortable - that's what I refer to as 'trade within your comfort zone."
Mark - I hope you don't feel I am evading the question, but there are so many variables in covered call writing that there is no way for me to know how much risk you prefer to take. But I would say that if you can make 2% per month, then you are doing just fine. You may be able to make 5% or more, but it would definitely involve taking more risk than makes me comfortable.
-- Mark D. Wolfinger Create Your Own Hedge Fund: Increase Profits and Reduce Risk With ETFs & Options http://www.mdwoptions.com
> Isn't selling calls a bearish strategy? You're just protecting yourself from a drop in the price of the stock. I believe selling puts suggest a bullish sentiment. If you really feel the price of the stock is going to rise or stay
> level then selling naked puts below the current price could potentially be a better strategy as long as it price of the
> underlying stock does not go below the put target price. Not only that but you are not out the money since you're the
> own receiving the premium and just waiting for the time to eat up the value of the put option.
> Would the best way to generate real cash would be to sell covered calls and naked puts on the same stock? If the
> price stays the same at expiration date you get to keep the premiums plus your shares, if the stock goes over the call
> target price, then you keep the premium from the call plus the premium from the put and you lose your shares. If gets
> closer to the put target price then you can buy it back using some of the money from the call premium to offset the
> additional cost of getting it back.
> This strategy has worked very nicely with a stock like AAPL which keeps going up and for the most part the put options
> have expired worthless.
> 1) Selling (naked) calls is a bearish strategy. But not when the call you sell is a covered call. In that situation, there is a huge possible loss if the stock price tumbles. And although you can earn less than you might have earned (had you not sold the call), the upside is always profitable when you sell a covered call. Thus: always profit on an up move and incur the chance of a substantial loss on the downside makes the strategy bullish, not bearish.
> 2) Yes, selling puts is a bullish strategy. But it is exacly equivalent in risk and reward as writing the covered call (assuming the strike price and expiration date of the put and call under disucssion are identical.
> 3) Although the 'best way to generate real cash' is to sell the (naked) put and call (straddle or strangle), that is by far the riskiest strategy you can adopt. Sure, you may have a very profitable situation, but it is also possible to have a big loss. I recommend this stategy only for the most sophisticated investors. And even then, I do not like the idea of selling a naked strangle. I much prefer the iron condor strategy in which neither the put nor the call is sold naked. I note that youa re suggesting selling the 'covered' strangle in which you own shares. Yes, it's a good strategy, but the truth is that selling the covered strangle is the same as writing one covered call and selling one naked put. Thus, you are merely doubling the size of your position whne you make this trade.
> 4)Any strategy works part of the time. The decison must be made: can you earn more when it's profible compared with your losses when it is not. Each investor makes that decision alone. But for me, too much risk to sell both the call and the put without buying further out of the money options for protection. And I don't use the covered strangle - not because it's not a good strategy, but if I merely sell 2 puts (or write 2 covered calls), I accomplish the same goal.
Mark D. Wolfinger
Create Your Own Hedge Fund: Increase Profits and Reduce Risk With ETFs & Options