Join our investing community

Covered Calls anyone?

Discussion in 'Shares' started by Ol School Skata, 12th Nov, 2005.

  1. Ol School Skata

    Ol School Skata Well-Known Member

    Joined:
    7th Nov, 2005
    Posts:
    71
    Is anyone here writting covered calls to generate income from their shares? I have done this previously and am looking to commence again soon ...maybe writting puts on shares i would like to purchase.

    Please put forward your comments

    OSS
     
  2. Jacque

    Jacque Team InvestEd

    Joined:
    16th Jun, 2005
    Posts:
    1,885
    Location:
    Sydney
    Hi OSS
    Would you care to share your experiences of how you went last time with this? Also, what period was it over?
    My partner tried covered calls over the course of 12 mths a few yrs ago but didn't have great success, so has mixed feelings about doing them again.
    It would be great if you could share, however, and let us know how you're going this time around.
     
  3. Andrew

    Andrew Active Member

    Joined:
    16th Aug, 2005
    Posts:
    27
    Location:
    Moonee Ponds
    IMHO there are much better strategies to use than covered calls,
    covered calls are crap unless the underlying is trending sideways
    and if that's the case the volatility is probably low and therefore
    premiums not high enough.

    You have to be well capitalised to try this, writing 1 contract
    won't cut it because brokerage wipes out a good chunk of your
    premium income.

    Selling a put (synthetic covered call) is a better strategy to my
    mind because of lower capital requirements and the ability to
    write against a different underlying asset when the situation suits,
    rather than selling out/buying back in order to hold the stock
    you want to write against.

    I have tried covered calls after watching a Peter Spann video but
    I lost a good chunk of money. I'm sure that there are people out
    there making money from covered calls but it's not all beer and
    skittles.

    andy
     
  4. Ol School Skata

    Ol School Skata Well-Known Member

    Joined:
    7th Nov, 2005
    Posts:
    71
    I had been paper trading covered calls for about 18 months and studying this process for some time. In about Nov last year I decided to give it a go and chose to buy Lihir Gold Shares to write calls on. Bought initial parcel of shares at $1.25.

    After settlement - wrote Dec call options with a price of $1.30 received premium of 3c per share or $30 per contract (contract is 1000 shares). End of Dec - options expired out of the money

    then Sold January 1.20 calls for 1.5c/share or $15/contract. Expired at end of month out of the money.

    No calls written in Feb (away on leave)

    Sold Mar 1.10 calls for 5.5c/share or $55/contract. Expired that month out of the money


    Sold Apr 1.20 calls for 2.5c/share or $25/contract. Expired that month out of the money

    Bought more Lihir Gold Shares in May at $1.01 (did not write calls on these for May or June)

    No calls written in May

    Sold June 1.30 calls for 3c/share or $30/contract. Calls exercised. Sold shares at $1.30

    Sold July 1.30 calls for 2.5c/share or $25/contract. Calls expired out of the money

    Sold Aug $1.30 calls for 5c/share or $50/contract. Calls exercised. Sold at $1.30

    In August the share prices started to rise and i did not buy shares back to write calls on. At this point i wanted to write puts on the shares but never got around to getting my paperwork with the broker sorted out. And the shares kept climbing. In the last week have gone in excess of $2.15. But hindsight is powerful.

    Yes i would have made more money simply holding the stock until now but my view at the time was neutral on the stock. Was simply a trading experiment.

    So my experience doing this is not great, but was a good experiment. My view now is to write puts on stocks i would like to own to take advantage of them falling in value. If they don't fall, I keep the premium, if they do, i am buying at a price below the price when i first considered the stock. Plus i would earn interest on the cash used as collateral, so would offset brokerage costs, OCH fees etc.

    If someone else they can do the further analysis on my numbers

    OSS
     
  5. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,394
    Location:
    NSW
    OSS,
    Do you consider write naked strangle instead of sell/write calls or puts ?.
    I am just curious....
    :cool:
     
  6. Ol School Skata

    Ol School Skata Well-Known Member

    Joined:
    7th Nov, 2005
    Posts:
    71
    I toyed with the idea but did not really consider any further. Just wanted to get my feet wet with the covered call strategy.

    I did consider doing the following

    Buy the underlying stock
    Sell call options over the stock out of the money - so continue with writing covered calls
    Sell put options to buy more if the stock fell out of the money - was happy to buy more stock if prices fell so as to write more covered calls over.

    But was not that confident in knowing what i was doing.

    And thought there had to be a better way to improve returns with minimal exposure maybe bull put spreads, or bear call spreads....

    At this point got to complex...i liked the idea of covered calls - relatively simple strategy
     
  7. Brad

    Brad Member

    Joined:
    21st Oct, 2005
    Posts:
    5
    Tropo,

    Can you give us an example of a naked strangle that you have done?

    I have written calls to enhance returns on long positions, it is not straight forward. I am not convinced that it is the cash cow that Peter Spann makes out.

    Perhaps the current market conditions are a bit volatile and other strategies need to be adopted.

    My over-zealous broker calls me twice daily pressuring me to exit positions when the price gets close to the strike. A few times now he has pressured me to exerice (he doesn't like rolling up) only to see the rally tank the next day!!!

    Cheers
     
  8. redrover

    redrover Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    131
    The only thing brokers are concerned about is churning. Brokers send you broker!!! Do it yourself.
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    This stuff sounds way too kinky for my liking :p

    Although I have no doubt that I could learn to invest using all these strategies - it really doesn't interest me. I don't have the time either :(

    You can have it !
     
  10. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,394
    Location:
    NSW
    Brad,

    I do not trade options so I might be wrong person to ask.
    When I was trading Stock Market I played with warrants from time to time....
    Below is hypothetical example...which you requested.

    If you are conservative trader consider out-of-the-money combination...
    So .... you can strangle say XYZ which is trading at say $ 5.25.

    Maybe in this situation might be possible to sell an XYZ at say 475 Sept put for 15c and the XYZ 550 Sept call for 30c.
    So total premium income is 45c.
    So your downside break even point = $ 4.30 ( 475 - 45c ) and the upside break even is $ 5.95 ( 550 + 45c )

    The perfect outcome ( in above case ) is if XYZ finish somewhere between $ 4.75 and $ 5.50 at expire ( both options would expire worthless ).

    PS. Who is Peter Spann. Never heard of him....= sorry... :eek:

    OSS,
    Spreads might be another way...Up to you....

    Redrover .... you are dead right saying that " Brokers send you broke!!! Do it yourself. ".
    I fully agree with you !!!!!!!!!!!!!!!!!!!!!!!!!!.

    Sim.....yep....it's too much "fiddling" with this instrument.
    I am not patient enough to play this game.

    Happy trading guys... :D
    :cool:
     
  11. Mark Leo

    Mark Leo Well-Known Member

    Joined:
    16th Aug, 2005
    Posts:
    59
    Tax treatment of expired options

    Does anyone know how expired call options should be treated at tax time? Obviously you would prefer not to be holding this type of option when they expire in the first place, but when it does happen, can their cost be deducted from other forms of trading income?.....or just other forms of (any type of) income in general?

    Any ideas ACCOUNTANTS?
     
  12. Ol School Skata

    Ol School Skata Well-Known Member

    Joined:
    7th Nov, 2005
    Posts:
    71
    Not an Accountant...

    I believe if you bought an option and it expired then you have capital loss

    eg bought option/s - cost $1500 plus brokerage and OCH fees $75
    Total cost is $1575
    If it expires out of the money - treated as a capital loss

    If you wrote an option and it expired then it is treated as a capital gain
    eg sold option/s for $1500 cost $75 in brokerage

    Captial gain is $1425

    If you are classifed as a trader, then i believe gains and losses are classified as income and expenses.

    But check with an educated options accountant or ring the ATO

    OSS
     
  13. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    If you are classed as a share trader then you would argue that the losses are on income account.

    there is certainly no cut and dried answer to when you are a trader.
    Case law and ATO rulings are specific to individual circumstances and the only way to gain certainty is to apply for a PBR.

    If you are trading in volumes and using more advanced strategies such as covered calls and using software, and dedicating some of your day to trading then you are on track to being possibly classified as a trader.

    nick m