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capper

Selling Covered Calls

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Just curious is there are some traders out there that sell covered calls using a strike price that is well below their average stock purchase price...  Some of my stocks have been getting hammered and I have been selling covered calls on them well below my average price.  If they shoot up a lot, I feel obligated to buy back or roll them so that I am not taking a significant loss on my investment.  Having said that, these are stocks that I expect at some point will turn around and ride above my purchase price.  

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30 minutes ago, capper said:

Just curious is there are some traders out there that sell covered calls using a strike price that is well below their average stock purchase price...  Some of my stocks have been getting hammered and I have been selling covered calls on them well below my average price.  If they shoot up a lot, I feel obligated to buy back or roll them so that I am not taking a significant loss on my investment.  Having said that, these are stocks that I expect at some point will turn around and ride above my purchase price.  

I used to do a lot of that in the recent past, except I went long LEAPS instead of the actual stock. The shorts were usually ~45 days out, at around 21 delta. It mostly worked, but I decided it wasn't worth the effort of rolling the shorts, and keeping track of the rolling the LEAPS.

The Simple Spreads strategy here, at SO, could be considered similar in concept, although it is tactical/opportunistic. Trade selection is based on certain criteria. It uses ITM longs a few months out, and sells shorts against them around 30 days out.

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I do this a lot with my option long positions. These are LEAPS against which I sell weekly options (mainly) this generally works out very well giving just a little added cushion when the market goes down. If the stock rips up it can go wrong, TTD was a recent example, but generally you get back what you lose on that in the next few weeks.

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Hi @TrustyJules, I have been doing covered calls with stocks, I suppose some of the advantages are that with dividend paying stocks you get a dividend but you invest more capital, are there other reasons for doing LEAPS? Also, how do you decide the price that you sell the short options for and the expiry (e.g. DTE)? Thanks a lot

Edited by Alex_london

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19 minutes ago, Alex_london said:

Hi @TrustyJules, I have been doing covered calls with stocks, I suppose some of the advantages are that with dividend paying stocks you get a dividend but you invest more capital, are there other reasons for doing LEAPS? Also, how do you decide the price that you sell the short options for and the expiry (e.g. DTE)? Thanks a lot

The leverage more than compensates for dividends. As for the choice of short - I want at least 50$ per position as a rule otherwise its not worth it. The strike I choose based on ATM+price of ATM call in the short expiry week rounding up. The presumption being that ATM is correctly priced and will cover the majority of any move up if you add the cost of the call to the ATM strike.

So for example XYX is at 100$ and I own JUN 2022 100$ strike LEAP. In the 10/29 expiry the ATM C 100 is priced at 2$ - I would then choose to sell the 102.50$ strike call for that week.

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15 minutes ago, Alex_london said:

Thanks @TrustyJules do you usually buy ATM LEAPS and how out do you go? Do you use any criteria for potential candidates?

Same strategy for the strike of the ATM LEAP as for the short. So I look in the LEAP expiry and will choose the strike that ATM strike+ value of ATM Call for that expiry.

My longs are based on momentum strategies (mainly) - simply choosing stocks that have risen before and presuming that they rise more which more often than not is the case. I use an indicator service for this from Germany which has worked very well for me - but there are many momentum services both free and paying.

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11 hours ago, Alex_london said:

@TrustyJules ok so just to play this back to you with an example, XYZ stock is trading at $130 and the Jun 17 ATM call mid price is $10 you would buy the $140 call right? How out do you buy call (e.g. 3, 6 months) from now?

Yes.

 

As regards how far out I tend to look minimum 3 months away, up to 6 months is fine but you can go longer if you think you will hold more than that. Its simply that a momentum stock may lose its momentum in a 6m period so it doesnt always pay to go out furthest. Also if you go over a year the LEAPs will react a little less synchronously with your short. Perhaps I should say - even less synchronously - which may make the trade difficult.

I will roll the LEAP at least one but often 1.5-2 months before expiry as theta bites hardest in the last month. Exceptionally I might hold up to 2 weeks before but not more.

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On 10/25/2021 at 4:25 PM, Oppi said:

Hi @TrustyJules, which indicator service do you subscribe to?

Thanks

Sorry I missed this Oppi - my apologies. I use a german service called TSI, I use the following newsletters

https://www.boersenmedien.de/produkt/die-800-strategie-2021.html

https://www.boersenmedien.de/produkt/tsi-premium-2019.html

https://www.boersenmedien.de/produkt/tsi-usa-2018.html

As you are swiss you may be able to work with that.

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On 10/29/2021 at 6:58 PM, TrustyJules said:

Sorry I missed this Oppi - my apologies. I use a german service called TSI, I use the following newsletters

https://www.boersenmedien.de/produkt/die-800-strategie-2021.html

https://www.boersenmedien.de/produkt/tsi-premium-2019.html

https://www.boersenmedien.de/produkt/tsi-usa-2018.html

As you are swiss you may be able to work with that.

 

Thanks I will have a look.

Do you follow their trading recommendations 1:1, or base your own options strategy on their stock picks?

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7 hours ago, Oppi said:

 

Thanks I will have a look.

Do you follow their trading recommendations 1:1, or base your own options strategy on their stock picks?

I dont follow 1:1 as they use some domestic options and I prefer to trade the real markets. Also I transform most stock picks into option positions which I hedge.

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