Covered Calls

Hey

I was having a disscussion with a client today. He has taken some money out of his super into a SMSF. A broker(or friend) has perswayed him to dabble in a little in options. No one in my office is really specialised in options.

My knowledge is very limited in this area but has anyone dabbled in coverd calls here or current trading them in or outside of super? I realise they can be on the safer side of the options market if you control risk with puts etc but the guys banging on about 3% a month. I agreed and let him go as I didnt want to bust his bubble.


Anyone deal in coverd calls here? If so how controllable is the risk and how has your success been with trading in this area thus far?

Cheers

 

Never touched options. However I did exist as a full time retail combatant of the financial markets for half a decade, profitably as well. So the following advice is from theory only, theory however that I believe is so robust that you are most unlikely to refute it with solid proof.

3% a month... ermm.... show me the audited records please

Have a look at the buy/write index, this is what you will be expected to return/under perform as a covered call trader, less until you have some form of edge (darned difficult to get and quantifiable and provable when you do have one). Anyone who would dispute this is most likely 1) Selling something 2) So clueless as to be unable to define what their risk adjusted returns and expectancy are.

Cynical and the best advice I never took Good luck!

 

3% a month... ermm.... show me the audited records please

My thoughts exactly. This Broker or mate should go into business as a trader instead. Client is dead set on it though and the good thing is he has only withdrawn a small amount.

3% a month is BS but anyone traded covered calls before? How did you find them and specifically how much control do you have over your risk if you implement other options in conjuntion with the covered call. That's what particularly interested me about it when I was discussing with him the control you can have over your downside.The client actually sold it well to me. I know at end of the day the results are unrealistic and in 6months time he will be telling me how **** coverd calls are but you cant stop it from happening so ill just sit back and enjoy the show.If he does well than im happy for him.If he does badly then he has learnt his lesson. Win Win.

Still like to hear from any covered call traders out there and your experience with them? How did you manage your downside risk?

 

Covered Calls: More on Why They're A Losing Investment Strategy - Seeking Alpha
Covered Call Writing

 

Covered calls can return very well, possibly 3% a month provided you don't get called on the underlining stock. It would certainly be a good strategy to increase income if a flat market. The problem is you need have a lot of stock (each option or contract is taken over 1000 shares) and have purchased at less than the strike price you sell the options at.

For those who do not know what a covered call is basically you sell the option to buy 1000 shares in a stock at an agreed price by an agreed time. You are payed a premium for this. If the underlying stock fails to reach that strike price the option expires and you keep the premium and the stock.

If the strike price fails to be reached you can keep selling calls on the stock month in and month out, i.e. generating possibly 3% returns p/month. Once the call strike price is realised you have to sell the underlying stock or buy your call back at a higher rate.

A sound strategy if you purchased the underlying stock below its current price; best case you see 3% p/month and hold stock - then do it again and again..., worst case see 3% return and have to sell at a profit.

Better than a whole lot of investments out there at the moment and much safer than having a naked position in the options market.

Rather than dispute your clients choice of investment it might be better to look into the regulations re. option trading through a SMSF. I was trading bear call spreads through my SMSF was had to stop because I was going close to making the fund non-complying.

 

The covered call strategy on the Australian market does not provide investors with good returns. The Australian market only gives you a return of 1 - 2% per month and plus the australian market is not a very liquid market as it only makes up 2% of the world financial markets.

You need to invest where all the big boys invest, the big banks and financial institutions, the US market. The US market makes up 85% of the world financial markets, everybody trades the US market, it's a highly liquid market and the returns you can achieve on a monthly basis is between 3 - 9%.

The covered call strategy is allowed to be transacted in a SMSF as it's low risk. It's preferred than just owning the stock. You manage your downside risk buy buying put options which you utilise a portion of the premium that you receive by selling the call option to buy the put. Also if you find that s tock is dropping in value you can roll down your position to reduce your overall risk.

Danny Younes

 

take a look at this:

Options as a Strategic Investment,Third Edition: Lawrence G. McMillan: 9780136360025: Amazon.com: Books