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BLOBY
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Covered Calls for asset management

September 21st, 2006, 11:59 am

Does anybody use covered calls writing for asset management ? I wonder if it is a good way for performance enhancement ?
 
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ppauper
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Covered Calls for asset management

September 21st, 2006, 12:22 pm

a number of people do.
 
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dopeman
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Covered Calls for asset management

September 21st, 2006, 9:53 pm

Great in sideway markets, won't be pretty in trending ones.
 
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nazzdack
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Covered Calls for asset management

September 22nd, 2006, 12:41 am

Since overall volatility levels are so low, it wouldn't generate much income. Start doing it after a huge market crash.
 
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BLOBY
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Covered Calls for asset management

September 22nd, 2006, 6:47 am

Dopeman, could you explain in details your observation ?
 
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DavidJN
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Covered Calls for asset management

September 22nd, 2006, 11:56 am

If the market moves "sideways" (i.e. moves neither up nor down) you don't lose anything on your long share position and you get to keep the option premium because the call won't finish in the money (assuming it wasn't struck in the money). In a down trending market you may lose more on the share holding than the call premium generates. In an uptrending market you may lose upside by getting taken out by the call. nazzdacks comment about low vols is worth noting.
 
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BLOBY
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Covered Calls for asset management

September 22nd, 2006, 12:29 pm

Ok, thanks a lot.But do people use index option or single stock option ?Furthermore, do you know other ways for portfolio's performance enhancement ?
 
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Traden4Alpha
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Covered Calls for asset management

September 22nd, 2006, 12:43 pm

The total payoff of a covered call is capped by the strike. If the underlying moves upward above the strike, the option holder will exercise the call and insist that you sell your position to them for the strike price. In an upward trending market, you lose the upside with the covered call. In a downward trending market, a covered call is fine, although the premium you get from selling the call may be quite small.
 
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ppauper
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Covered Calls for asset management

September 22nd, 2006, 1:42 pm

QuoteOriginally posted by: Traden4Alpha In a downward trending market, a covered call is fine, although the premium you get from selling the call may be quite small.and that's the point of a covered call, is it not ?you think there's going to be a short-term pullback but the stock will do well in the longterm, so you write a covered call while retaining the stock
Last edited by ppauper on September 21st, 2006, 10:00 pm, edited 1 time in total.
 
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Traden4Alpha
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Covered Calls for asset management

September 22nd, 2006, 3:08 pm

QuoteOriginally posted by: ppauperQuoteOriginally posted by: Traden4Alpha In a downward trending market, a covered call is fine, although the premium you get from selling the call may be quite small.and that's the point of a covered call, is it not ?you think there's going to be a short-term pullback but the stock will do well in the longterm, so you write a covered call while retaining the stockExactly. You could argue that covered calls are a mean-reversion play. The underlying will either revert from a downtrend or will limit any uptrend to above strike price while you, the call writer, reap a stream of premiums.
 
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dopeman
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Covered Calls for asset management

September 22nd, 2006, 9:58 pm

A lot of people do covered call writing for high dividend stocks. They get the dividend yield and the call premium. If the stock is in the money, they roll their position, ie, they buy back the front month in-the-money call and sell back month out or at the money calls. These stock tend to be stable, eg. big oll companies. I think it's a great strategy.
 
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nazzdack
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Covered Calls for asset management

September 23rd, 2006, 3:57 pm

You guys are starting to "abuse" the strategy. (1) If you're capable enough to anticipate pullbacks in a stock, you should sell the stock and/or short-sell it. Otherwise, you might have to do months and years worth of call-writing to earn back your capital losses. (2) Higher-dividend paying stocks tend to have lower implied volatilty which again diminishes the premium you can expect to collect. (3) It isn't much different than selling naked options. You make money several months out of the year, break-even a few times AND get crushed a few times. Overall, it's a lame strategy.
 
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dopeman
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Covered Calls for asset management

September 23rd, 2006, 10:37 pm

I agree it is a lame strategy if you are a market timer. However, a lot of people are long term buy-and-hold type (does not matter what the market does), in this case they lose little by doing buy-writing unless the market goes up like a rocket.
 
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Traden4Alpha
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Covered Calls for asset management

September 23rd, 2006, 10:42 pm

QuoteOriginally posted by: nazzdackYou guys are starting to "abuse" the strategy. What's wrong with abuse if it adds profit?QuoteOriginally posted by: nazzdack(1) If you're capable enough to anticipate pullbacks in a stock, you should sell the stock and/or short-sell it. Otherwise, you might have to do months and years worth of call-writing to earn back your capital losses. Partially true. Selling a covered call adds profit to a Long equity position under all conditions except if the expiration price closes above the strike by more than an amount equal to the premium minus transaction costs. Thus you need only have an expectation that the equity won't rise too much. Yes, if you really think the equity will drop, then sell or short-sell. But if you think the equity will rise modestly you can add profit with a covered call.QuoteOriginally posted by: nazzdack(2) Higher-dividend paying stocks tend to have lower implied volatilty which again diminishes the premium you can expect to collect. Yes, but the premium you collect is greater than zero. I wouldn't call it free money, but subject to the assumptions about modest price appreciation, the covered call does adds profit.QuoteOriginally posted by: nazzdack(3) It isn't much different than selling naked options. You make money several months out of the year, break-even a few times AND get crushed a few times. Overall, it's a lame strategy.Very untrue. You can only get crushed by a covered-call position to the extent that the underlying drops in price. Any "crushing" is due to the Long equity, not the sold call. Thus, a covered call is no more risky than a regular long position. In fact, covered calls have lower volatility than the corresponding Long-only position -- they actually reduce losses when prices drop. If the price of the underlying drops, the price of the sold call also drops by delta (which means that I can buy the call back at a profit if one wants to unwinds the position).Covered calls aren't lame. They simply add a known amount of profit now in exchange for a foregone opportunity for a certain amount of potential profit later (if the underlying closes sufficiently far above the strike).
 
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nazzdack
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Covered Calls for asset management

September 24th, 2006, 3:06 pm

T4A---I mostly agree with what you said. (1) I still think you're underestimating risk. Being willing to "tolerate" large losses in exchange for puny premiums is never a good trade-off. (2) I also think that people who are enamored of covered-call writing have a fear of selling off long-term holdings at a profit or loss and take misguided comfort in receiving the call premiums. Translation-----they're somehow "married" to the position. (3) I have yet to meet a trader who prided himself on picking stocks that would stay flat or rise modestly.
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