[cannon_fodder]

I've read a book and gone to a few websites to learn more about this strategy. The problem is that they talk about theoretical examples and I need to understand how to look for the appropriate value based on stocks I own right now (e.g. TD et al., MX, HSE, TCK.B).

Is there an investment club or good blog where I can start taking advantage of my long positions in stocks to earn a little more money beyond the dividend payments?

 

[Murph]

You might want to read 'Options Trading for the Conservative Investor' by Michael Thomsett or 'Cashing in on Covered Calls' by Alan Ellman before you start selling calls.

You might also want to check out the following websites:

For info on calls and puts you can use yahoo finance or:

http://www.cboe.com/ (U.S options)

http://www.m-x.ca/indicesmx_mcwx_en.php (Canadian options)

For info on returns you can check out:

http://www.callpix.com/ (The greater the return, the higher the volatility)

http://www.optionistics.com/ (They offer covered call info that is delayed without a paid subscription)

To calculate return on different call options you can use the following covered call calculator:

http://www.volatilitytrading.net/covered_call_calculator.htm

Hope this helps!

 

[cboenews]

This is a great list of resources.

 

[OntFA]

Perhaps a more practical resource can be found here. This is a good forum but I've not found it to be as reliable as FWR when it comes to more complex strategies like covered calls. I had no time to read the whole thread, this post on the first page seems like a good place to start. I have been asked about this strategy a few times and my answer is the same every time. Don't do it. It can work for a long time but all it takes is one slice of time when prices take off and you miss all of the upside (because your shares get called away) and the whole strategy suddenly looks bad over a long period of time. If you want to use options, roll over puts as a protection strategy. There's a cost to it but you're not going to totally cut off your upside like you do with writing calls on your stocks.

 

[humble_pie]

an ideal portfolio to support a secondary and income-producing strategy of calls and puts consists of long positions in solid, highly liquid, dividend-paying companies. Such a portfolio is inherently conservative.

in addition, these companies should have multi-year histories of trading within a band. There can be exceptions, such as the months of october/08 to march/09, but generally these companies should move within a band that is broad enough to generate volatility but stable enough that the option trader can develop probability assumptions. TD is a fair-to-good example, my rating having to do with the big green's medium volatility until the 2008/09 crash. A different kind of example would be CNQ in US trading. This band is exceptionally broad, swinging between lows of USD $40 and highs of USD $100 while delivering rich premiums to the option seller. High liquidity in CNQ makes this band more stable and less risky than might be thought at first glance.

interestingly, almost never have options so proved their value as lucrative portfolio add-ons as during the past year. Many investors have lost investment income, as interest rates plunged and dividends shrank. This disappeared income can be made up by a carefully managed options campaign.

there are good candidates for long stock/short call writing in fodder's list. Take TD for one. What are your own predictions for the big green, I wonder. I would assume you are somewhere on the bullish spectrum as otherwise you would not own this bank.

there is a vast array of TD call options that you could sell. The questions then become:

- how bullish are you.
- what is your time-frame prediction for the big green.
- how much do you need the option income.
- what is the open interest of the contacts you are considering to sell, ie how liquid are they.
- what are the IVs for the contracts you are considering.
- what kind of spread is present for the contracts you're considering, ie are there numerous other players or just the market maker.

if you haven't sold your TD calls yet and if you're something of a beginner, may i offer a humble hint. Sell calls that are fairly high out-of-the-money. Yes, there will be lower IV, fewer players & less profit. However the position will be less nervewracking & more educational.

best of luck to you.

 

[OntFA]

in addition, these companies should have multi-year histories of trading within a band. There can be exceptions, such as the months of october/08 to march/09, but generally these companies should move within a band that is broad enough to generate volatility but stable enough that the option trader can develop probability assumptions.

So, stocks should be volatile but predictable? The two are mutually exclusive I'm afraid. You can't have the predictability you're looking for with the high enough volatility to give you a healthy option premium.

interestingly, almost never have options so proved their value as lucrative portfolio add-ons as during the past year. Many investors have lost investment income, as interest rates plunged and dividends shrank. This disappeared income can be made up by a carefully managed options campaign.

I'd rather use corporate bonds (or solid dividend payers in a cash account) than buy a basket of stocks and write options against them, thereby handing me most of the downside with almost none of the upside.

if you haven't sold your TD calls yet and if you're something of a beginner, may i offer a humble hint. Sell calls that are fairly high out-of-the-money.

This is a perfect example of what I spoke about in my last post. You're suggesting that an investor who is "something of a beginner" should sell deep out of the money calls?!?!?! That would be ill advised to say the least. The words "beginner" and "options" should not be uttered in the same paragraph when providing suggestions to others.

 

[Dana]

I would only use covered calls with securities that I am willing/looking to unload anyway at the strike price that I have decided to sell at. If I unload the security at the price I want, great. If not, at least I have earned the premium.

Be sure you are prepared for the tax implications that would arise if the shares are called.

 

[OntFA]

I would only use covered calls with securities that I am willing/looking to unload anyway at the strike price that I have decided to sell at. If I unload the security at the price I want, great. If not, at least I have earned the premium.

Be sure you are prepared for the tax implications that would arise if the shares are called.

This sounds like a reasonable way to implement this strategy but it too has its pitfalls. There is always the risk that fundamentals change between the time the option is sold to the time it gets called away. Other than that, your strategy of lining up strike prices with sell targets at least makes sense. In my experience, however, most individuals don't have a real discipline for setting price targets on stocks.

 

[humble_pie]

oh dear. This is a mutual fund dealer, apparently without an option license, laughably mis-using and not understanding the vocabulary, who is trying to deflect readers towards the limited products she is allowed to sell.

a covered call writing strategy is the most basic & simplistic introductory step. It is the opposite of a "complex strategy." For shame.

there is no such thing as a "deep out of the money call." A deep in-the-money call (risky) is the opposite of a high out-of-the-money call (little risk.) For shame.

only ignoramii raise the following objections: 1) writing covered calls places a low ceiling over upside gains, and 2) the sole proper option strategy is buying protective puts.

in reality no good options trader gets assigned unless he collaborates in this outcome. Critical dates are all known in advance. Every option trader must learn to adjust his positions accordingly and continuously. An ITM call position, for example, gets rolled over, nearly always profitably, into another strategy well ahead of a critical date, which is not necessarily the expiration date.

as for protective puts, this advice, along with collar strategies, is often peddled in low-quality so-called "option seminars" (these are high-fee seminars given by private outfits, not the helpful free or low-cost seminars sponsored by the options exchanges.) Protective puts & collars sound reassuring to newbies & they make a seminar leader sound knowledgeable, but in reality the advice is meaningless nonsense. The cost of buying protective puts on individual stocks is insanely & prohibitively high. The true insurer hedging against downside risk will buy a broad index put. This is often skewed for a canadian portfolio as most liquid index puts are US.

i've already praised the solid dividend payors, but in my portfolio these generate a substantial additional income stream arising from the constant and repeated sale, over time, of out-of-the-money call options. Corporate bonds and mutual funds are not yielding these kinds of returns.

 

[Rickson9]

I've written covered calls, but it is rare. You shouldn't write covered calls if you cannot accept your stock being called away. With my current style of investing, there is no stock that I wish called away.

I do, however, write puts during price declines and on stock that I wish to acquire, but that's a different story.

 

[OntFA]

oh dear. This is a mutual fund dealer, apparently without an option license, laughably mis-using and not understanding the vocabulary, who is trying to deflect readers towards the limited products she is allowed to sell.

It is dangerous to equate the limits of one's license with the same person's knowledge. But if we're going by your rule, are you options-licensed?

As for directing readers into anything, I deliberately post anonymously specifically so I cannot be identified or get any business from this forum. I don't want that kind of business so your assumptions are all wrong.

a covered call writing strategy is the most basic & simplistic introductory step. It is the opposite of a "complex strategy." For shame.

So everybody knows the put-call parity and is aware of the no arbitrage principle? You don't say.

there is no such thing as a "deep out of the money call." A deep in-the-money call (risky) is the opposite of a high out-of-the-money call (little risk.) For shame.

Really? Funny, when I Google "deep out of the money call" a whole bunch of results pop up, including from NASDAQ and some books. But when I Google "high out of the money call" the first result is your post in this thread. If you type that in this forum enough times, you just might convince someone that your terminology is the only correct one.

only ignoramii raise the following objections: 1) writing covered calls places a low ceiling over upside gains, and 2) the sole proper option strategy is buying protective puts.

To your first point, why don't you educate me, then, on exactly what happens when you hold a stock, you write a call against it, and then the stock price takes off. So, you get to keep all of the gains and the option premium? Must be since I'm clearly wrong, right?

As for protective puts, I did not say it's the only viable strategy but that it's the most suitable for the needs of most investors.

in reality no good options trader gets assigned unless he collaborates in this outcome. Critical dates are all known in advance. Every option trader must learn to adjust his positions accordingly and continuously. An ITM call position, for example, gets rolled over, nearly always profitably, into another strategy well ahead of a critical date, which is not necessarily the expiration date.

Critical dates are all known in advance, okay. Does that mean you know when and if a stock is going to make a big move? Because that would seem a critical date but one that is unknown.

as for protective puts, this advice, along with collar strategies, is often peddled in low-quality so-called "option seminars" (these are high-fee seminars given by private outfits, not the helpful free or low-cost seminars sponsored by the options exchanges.)

So, options exchanges, which benefit directly from more trading in options, are the ones offering good unbiased options education. And because I benefit from selling mutual funds, regardless of my knowledge, my input is meaningless? Interesting and illogical point of view.

By the way, if you think protective puts are "low quality" then you've just called Peter Cundill "low quality" because it's exactly what he did for years - rolling S&P 500 puts long enough for them to pay off. If I recall correctly, it's also what Nassem Taleb did - willing to take frequent small losses for the potential of a huge payoff down the road. And his payoff came last year. But these guys don't know what they're doing, right?

Corporate bonds and mutual funds are not yielding these kinds of returns.

But they don't share the same risk-reward profile of your options strategy.

I do, however, write puts during price declines and on stock that I wish to acquire, but that's a different story.

I think this is a reasonable strategy but this has significant risks too. A swift price collapse could force put writers to buy at prices way above market prices (which is exactly when put buyers will force your hand). It's also what Derek Foster reportedly did after he sold all of his long positions. Worked out terribly. None of this stuff is for beginners. None of it.

 

[cannon_fodder]

there are good candidates for long stock/short call writing in fodder's list. Take TD for one. What are your own predictions for the big green, I wonder. I would assume you are somewhere on the bullish spectrum as otherwise you would not own this bank.

there is a vast array of TD call options that you could sell. The questions then become:

- how bullish are you.
- what is your time-frame prediction for the big green.
- how much do you need the option income.
- what is the open interest of the contacts you are considering to sell, ie how liquid are they.
- what are the IVs for the contracts you are considering.
- what kind of spread is present for the contracts you're considering, ie are there numerous other players or just the market maker.

if you haven't sold your TD calls yet and if you're something of a beginner, may i offer a humble hint. Sell calls that are fairly high out-of-the-money. Yes, there will be lower IV, fewer players & less profit. However the position will be less nervewracking & more educational.

best of luck to you.

Thank you for SPECIFIC information. I appreciate all of the comments but as I tried to state, I wanted to understand how specifically to use options to supplement my income with prudent transactions.

I was thinking just as you said - be conservative for several months and gradually increase any aggressiveness as experience builds up.

 

[Berubeland]

I agree that writing puts and calls is not for the beginning investor.

I have observed on this forum that for every investor there seems to be a comfort zone in which he/she is comfortable. For instance in my case I buy and sell mostly warrants, a niche section of the market. I do very well there in my little happy place. Other's think I am crazy because they have heard it is very risky. When I try to explain to them what I am up to their eyes glaze over. So my strategy which works very well for me and seems very obvious to me is not obvious at all to others.

The point to my ramble is that if you are "attracted" to this area of the market give it a try. You may also develop your own lucrative niche that you are comfortable with.

Now I paid many thousand dollars for my formal education.... I also paid for my education in the stock market. You can be prepared to do the same. This does not mean you should not do it and learn more after all that is how people get to be educated investors.

My advice is check it out and tread lightly and test the waters while learning and remember how much it costs for university !!!

 

[humble_pie]

"None of this stuff is for beginners. None of it."

Wonderfully put. Pun is intentional. When may we hope to see the last of you.

 

[Rickson9]

I think this is a reasonable strategy but this has significant risks too. A swift price collapse could force put writers to buy at prices way above market prices (which is exactly when put buyers will force your hand). It's also what Derek Foster reportedly did after he sold all of his long positions. Worked out terribly. None of this stuff is for beginners. None of it.

I can't comment on what Derek Foster did (or didn't do), because I don't really know. What is the story behind this? Did he reveal what he did in one of his books (I haven't read them all)?

Personally I only write options and only after I felt I understood how to read financial statements.

 

[humble_pie]

nice to c u around fodder.

i think your mini-portfolio is dynamite. Hope you were in near the lows. That teck bee pick is brilliant.

if you've read couple books, attended couple seminars, you've learned enough theory about covered calls. You know you'll be selling to a counterparty the right to call your stock away from you at a fixed price and at any time prior to a fixed date in the future, etc. etc.

assuming you've done this basic homework, the next step is to study the entire option chain for one of the securities you mentioned. I mentioned td as an example, but a much more interesting candidate is teck.

you should be asking yourself, what will happen if i sell this call ? or that call ? how far out in time should i go ? which options are more suitable for a newcomer ? and which are the most lucrative to sell ?

no one can take you by the hand and say sell this, or that. I've already submitted a list of questions to help answer the above. For example, it's important to decide what you think is going to happen to td, or to teck, in the next 3, 6 and 12 months.

have to leave now. Maybe c u later. Homework: look at the chains, A the Q's.

btw i was surprised to see stunning volume of insider selling in tck.b. More than $20 million since august. Keevil himself dropped 140,000 sh last week. Do you have access to the short interest figs.

 

[cannon_fodder]

I've written covered calls, but it is rare. You shouldn't write covered calls if you cannot accept your stock being called away. With my current style of investing, there is no stock that I wish called away.

I do, however, write puts during price declines and on stock that I wish to acquire, but that's a different story.

I also want to embark on the strategy of selling puts. There are some stocks that I wish to add to my portfolio (e.g. TRP) but I'd like to pay less. I don't mind getting paid to wait for a possible fall to a value I'd be more comfortable with. One of the problems I see is the cost to set aside money on the chance you get to acquire the stocks. I have to find the time to do more research on how to calculate all of the costs (including interest).

 

[cannon_fodder]

I agree that writing puts and calls is not for the beginning investor.

I have observed on this forum that for every investor there seems to be a comfort zone in which he/she is comfortable. For instance in my case I buy and sell mostly warrants, a niche section of the market. I do very well there in my little happy place. Other's think I am crazy because they have heard it is very risky. When I try to explain to them what I am up to their eyes glaze over. So my strategy which works very well for me and seems very obvious to me is not obvious at all to others.

The point to my ramble is that if you are "attracted" to this area of the market give it a try. You may also develop your own lucrative niche that you are comfortable with.

Now I paid many thousand dollars for my formal education.... I also paid for my education in the stock market. You can be prepared to do the same. This does not mean you should not do it and learn more after all that is how people get to be educated investors.

My advice is check it out and tread lightly and test the waters while learning and remember how much it costs for university !!!

I dabbled with warrants when I first got into investing when I was 16. I was far more lucky than good - I was living out in BC at the time and my stepfather was involved with some firms that traded on the Venture Exchange (forget what they were called back then). Looking back now, it is a good thing I didn't need that money because they have a saying about fools and their money...

 

[cannon_fodder]

nice to c u around fodder.

i think your mini-portfolio is dynamite. Hope you were in near the lows. That teck bee pick is brilliant.

if you've read couple books, attended couple seminars, you've learned enough theory about covered calls. You know you'll be selling to a counterparty the right to call your stock away from you at a fixed price and at any time prior to a fixed date in the future, etc. etc.

assuming you've done this basic homework, the next step is to study the entire option chain for one of the securities you mentioned. I mentioned td as an example, but a much more interesting candidate is teck.

you should be asking yourself, what will happen if i sell this call ? or that call ? how far out in time should i go ? which options are more suitable for a newcomer ? and which are the most lucrative to sell ?

no one can take you by the hand and say sell this, or that. I've already submitted a list of questions to help answer the above. For example, it's important to decide what you think is going to happen to td, or to teck, in the next 3, 6 and 12 months.

have to leave now. Maybe c u later. Homework: look at the chains, A the Q's.

btw i was surprised to see stunning volume of insider selling in tck.b. More than $20 million since august. Keevil himself dropped 140,000 sh last week. Do you have access to the short interest figs.

Well, for the most part, my portfolio is up but I sure feel like I missed a great opportunity by not being patient enough. I will try to remember that it is better to get in a bit after the bottom rather than try to anticipate the bottom. And there are some ones that haven't been too kind (e.g. MFC, AGF.B, MX).

TCK.B was a lucky strike. I got in too early (around $10) and saw the stock continue to drop and THEN it suspended its dividend. Didn't have the guts (or the money, frankly) to put more money in below $8. So, what could have been a 10x bagger is still quite nice at about 3.5x. And, to think, I bought it to diversify my dividend paying portfolio - it is by far the best performer and yet no dividends! I have to tip my hat to milliondollarjourney because I wouldn't have considered it until I saw it in MDJ's Smith Manoeuvre Portfolio.

I'm actually thinking, like Rickson, that the ones that have performed well I want to keep. I don't mind looking at the ones that have not done as well - maybe that is backwards thinking, but I don't want the capital gains hit now (hopefully can defer it to a point where I'm retired and at a lower MTR) and I don't want to lose a front runner.

With the poor performers, perhaps with selling calls I can earn an additional premium over the lack of performance shown so far - especially one like MFC where they have slashed their dividend.

One thing I haven't investigated is an investment club. I would love the chance to sit down with people and have a discussion with a lot of varied opinions and a forum like this lacks some interactivity.

 

[cannon_fodder]

I can't comment on what Derek Foster did (or didn't do), because I don't really know. What is the story behind this? Did he reveal what he did in one of his books (I haven't read them all)?

Personally I only write options and only after I felt I understood how to read financial statements.

My personal opinion is borrow the book from the library. It isn't worth your money to purchase. He initially talked about how he retired early by amassing a portfolio of dividend paying stocks (as well as living frugally by today's materialistic standards). I'm sure the revenue from his books and related income streams has helped his retirement.