Covered Call Opinions

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Cortopassi
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Covered Call Opinions

Post by Cortopassi » Mon Jan 17, 2022 2:20 pm

**Sorry for the long post**

I wrote covered calls >10 years ago, trying to find the highest premiums, and bouncing from stock to stock. Worked well for a while until the financial crisis and I was left holding stocks I really did not care about that were severely underwater and I was terrified to write calls because of getting exercised at a loss.

Enter the PP, and now long term holding VTI, TLT, GLD (and for me, SLV).

I've dipped my toe back in and written a few weekly OTM calls on TLT, GLD and SLV and have pocketed some cash. Not much, but considering GLD and SLV especially don't pay dividends, I saw little downside to trying, esp. since this is in my IRA.
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So tomorrow starts a new week, and I spent the weekend reading and watching some videos, and I am asking for some thoughts, if anyone has any, on the points below.

1) Why am I writing OTM? Because I *think* I don't want to get exercised. But these premiums are tiny, because all of these are reasonably non-volatile. I also wrote OTM because I did not want to be called out. But it is a conundrum. One part of you wants the underlying to go up, but not go up so much that the holding gets called! Strange!?

2) After researching, it seems the better approach is to write ATM, or even a bit ITM. Maximize the current income/premium. Yes, a much higher chance of getting shares exercised, but also added downside protection.

3) When the shares get called, buy again, maybe with a cash secured put, ideally at the same price or lower that the call was at. So you can make some income in that direction as well. But since the intention is income, each successive buy price shouldn't really matter because you are trying to get called out.

The biggest takeaway for me is adjusting my thinking on not wanting to get called out. At any point in time, any ETF or stock has a 50/50 chance of going up or down. Especially if we are talking short term weekly options. Just given that data, I'm not sure why anyone would write anything other than ATM (especially if the goal is simply to bring in income, and not capital gains).
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Using current data, GLD is at $169.67. I can write a $169.50 strike call (slightly ITM) for $1.10. Accounting for the 17 cents in the money, the extrinsic (time value) premium is 93 cents. Or $93 per 100 shares.

Assuming GLD does not move for the week, the shares will get exercised at $169.50, and I effectively pocket $93 per 100 shares.

This is on a weekly call, 5 days. All being perfect, assuming I can do this 52 times a year (I know that's impossible), the effective yearly return is $93*52 = $4836 / $16,967 = 28.5%

Obviously that is almost guaranteed to be a best ever, not achievable, case. But even if I can can only hit half or a quarter of that, that's 7 to 14% yearly, on something that normally doesn't pay a dividend.
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Thoughts? If this is reasonably possible, would you try it and go for the income vs. the cap gains on the hope gold advances that much every year?

The only downside, is downside. If GLD, or TLT or SLV gets slammed. I'd get the premium, but now holding the ETF at a lower price. But I would have been holding it anyway, right? And by selling ATM/ITM, I have extra downside protection vs. OTM.

Thanks for reading.
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Re: Covered Call Opinions

Post by ppnewbie » Sat Jan 22, 2022 1:57 am

Is this in a tax deferred account?
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Re: Covered Call Opinions

Post by dockinGA » Sat Jan 22, 2022 6:35 am

Cortopassi wrote:
Mon Jan 17, 2022 2:20 pm
**Sorry for the long post**

I wrote covered calls >10 years ago, trying to find the highest premiums, and bouncing from stock to stock. Worked well for a while until the financial crisis and I was left holding stocks I really did not care about that were severely underwater and I was terrified to write calls because of getting exercised at a loss.

Enter the PP, and now long term holding VTI, TLT, GLD (and for me, SLV).

I've dipped my toe back in and written a few weekly OTM calls on TLT, GLD and SLV and have pocketed some cash. Not much, but considering GLD and SLV especially don't pay dividends, I saw little downside to trying, esp. since this is in my IRA.
-----
So tomorrow starts a new week, and I spent the weekend reading and watching some videos, and I am asking for some thoughts, if anyone has any, on the points below.

1) Why am I writing OTM? Because I *think* I don't want to get exercised. But these premiums are tiny, because all of these are reasonably non-volatile. I also wrote OTM because I did not want to be called out. But it is a conundrum. One part of you wants the underlying to go up, but not go up so much that the holding gets called! Strange!?

2) After researching, it seems the better approach is to write ATM, or even a bit ITM. Maximize the current income/premium. Yes, a much higher chance of getting shares exercised, but also added downside protection.

3) When the shares get called, buy again, maybe with a cash secured put, ideally at the same price or lower that the call was at. So you can make some income in that direction as well. But since the intention is income, each successive buy price shouldn't really matter because you are trying to get called out.

The biggest takeaway for me is adjusting my thinking on not wanting to get called out. At any point in time, any ETF or stock has a 50/50 chance of going up or down. Especially if we are talking short term weekly options. Just given that data, I'm not sure why anyone would write anything other than ATM (especially if the goal is simply to bring in income, and not capital gains).
---------
Using current data, GLD is at $169.67. I can write a $169.50 strike call (slightly ITM) for $1.10. Accounting for the 17 cents in the money, the extrinsic (time value) premium is 93 cents. Or $93 per 100 shares.

Assuming GLD does not move for the week, the shares will get exercised at $169.50, and I effectively pocket $93 per 100 shares.

This is on a weekly call, 5 days. All being perfect, assuming I can do this 52 times a year (I know that's impossible), the effective yearly return is $93*52 = $4836 / $16,967 = 28.5%

Obviously that is almost guaranteed to be a best ever, not achievable, case. But even if I can can only hit half or a quarter of that, that's 7 to 14% yearly, on something that normally doesn't pay a dividend.
-------
Thoughts? If this is reasonably possible, would you try it and go for the income vs. the cap gains on the hope gold advances that much every year?

The only downside, is downside. If GLD, or TLT or SLV gets slammed. I'd get the premium, but now holding the ETF at a lower price. But I would have been holding it anyway, right? And by selling ATM/ITM, I have extra downside protection vs. OTM.

Thanks for reading.
I don't know much about options, so maybe I'm misunderstanding. But what happens if, hypothetically, Russia invades Ukraine and China invades Taiwan at the same time, and GLD goes up to $200 in one week? You pocket $93 from the premiums, but have to sell your shares for $169.50 instead of $200, right? And lose out on all that upside?
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Re: Covered Call Opinions

Post by Cortopassi » Sat Jan 22, 2022 8:24 am

Yes. There are those outlier events that would limit your upside in that case.

But since I am not a trader in gld, assuming the rise wasn't enough to trigger rebalancing bands, that gain is on paper, and two days later when Russia withdraws, gld drops back.

In the meantime I have real gains from the option selling.

I'm only doing this on about 20% of my total. So far so good. Even if I stopped now, I've brought in $2200 in premiums on gld and slv, which is a lot more than zero.

I did get called on some shares, so I will need to write puts on those on Monday.

My spreadsheet is tracking straight gain/loss on paper for gld,slv and tlt versus premiums received for the option writing.

Currently 3 weeks in, the real gains from the option writing are about 2/3 the paper gain from straight pp buy and hold from Jan 1, almost all due to the recent large increase in slv.

But I am sure that will change as we go forward. Up and down on the paper gains, but always up on the option income. We’ll see where 2022 ends.
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