covered calls

Hi im still comming to grips with writing covered calls.
I understand the theory, but would like to see 'live' prices that i could receive if i did such options.

Can anyone pinpoint me to some sights where i can see the premiums i would get?

Also can covered call be writen at any time of the month?
Also they termination point is fixed isnt it? in other words, regardless of when i write the call, the expirery date is fixed according to the asx isnt it?
Also to reduce risk, you can write covered calls only once a share price is approaching your intrinsic valuation. In other words lets say share XYZ is priced at $4.50 My valuation is $5, so i write the covered calls at an excersise price of $5, that way if im hit, it doesnt really bother me.

Please note i am looking at this from an investors point of view (hence im more interested in the underlying share values, rather than blindly buy and write a share based just on call premium).


Appreciate any help on this, especially some links where i can see the sought of premiums that could be achieved.

Some online brokers have live pricing. You might have to open an account to get access to the pricing unless you already have a full service broker who you can call for quotes.

Yes, a covered call can be written at any time of the month, even moments before expiry technically. The ASX has an expiry calendar here. It's always a Thursday.

From my experience I used to write calls at strike prices that were previously used. i.e If BHP was trading around $40 then the strikes one month out might go $40, 40.50, 41, 41.50, 42 etc and I would write there.

option quotes here http://tools.afr.com/search/asx-search.aspx

Check with your own online broker what info you can get from there.

Otherwise the page below on the ASX will help you to get stock quote, strike prices, bid, offer and last premiums paid and also open ineterst (No of contracts.):

http://www.asx.com.au/asx/markets/optionPrices.do

Prices won't necessarily be live though, perhaps a 20 min delay. Have a play around by entering the stock code you wish to follow and looking at the strike prices and premiums likely to be received. Best to do it during market hours so the bid and offer columns don't come up as zeroes.

Expiry is usually the Thursday before the last Friday of the month except in December. I think it is the Thurs before Christmas.

Contract sizes are usually 1000 shares. So you have to own a decent chunk of a stock to write calls, and it must be a stock you'd be happy to sell if exercised. Not saying you would chilliaa, however if there is any emotional attachment to a stock (buy/hold long term), don't do this strategy.

If it's one you intend using as a cash cow for premium (or as Peter Spann refers to milking the premium) then you buy the stock then write the call. I find (and this is only my opinion) the contract sizes in Australia doing this strategy are large. In the US contract sizes are around 100 shares, so more bang for your brokerage buck as you can write far more contracts. I started paper/virtual trading US covered calls last year (commenced Jan 2008) and fortunately didn't commit real money to the straegy with all the volatility. The problem is that the stock you buy (if you don't already own it) can erode in value far greater (as in the past 18 months or so) than the premium received to use as a buffer on falling stock value. You can buy puts to hedge that position, however that eats away at your premium received.

Whilst volatility is the option traders friend, it has to suit your temperament also. I probably will return to that strategy in the future. I prefer to forsake some premium for a safer ride by way of less volatility, however that's just me. Others use the volatility to extract the highest premium possible.

I've digressed a bit. Try that ASX info first and as charttv has mentioned a live account (assuming you don't have one) is the best to paper trade with. Now would be a good time to be doing this. You can write at any strike price you wish. In the money, at the money or out of the money. As a writer of options time is on your side, you are selling time decay. You have sold the buyer a depreciating asset. Probably the easiest way to start is on stock you already own that is downtrending or going sideways to benefit from the premium received.

I'm no expert by any means and I'd be happy to hears other's views also. We are all here to learn.

There are a couple of good reasons to write covered calls on the NYSE.

A "contract" is only 100 shares in the US but 1000 here.
There are hundreds of shares and indices with the required level of liquidity but only a few, expensive ones, here.
Combine the two facts above and you see that you need $30 - 40 thou to buy/write a contract on BHP.
You get better premiums in the US.
Brokerage is cheaper and there are plenty of charting and filtering sites you can use to find "good" prospective shares.

optionsXpress is a US site that allows you to buy/sell options. Locally, you can get codes and y'days prices in the AFR. I'll have a look during the day and find a convenient site for "live" prices.

If you are serious about this you may want to spend a few days and a few thou doing a seminar by a guru such as Daniel Kercher. I did but have never followed up on it. I should do a refresher because I think the conditions are right for such a strategy now.

Such a query might be better received on HotCopper. There are certainly some very shares savvy people there.

I've been considering stepping back into this arena. Can any of you recommend a good online broking platform for trading (not charting) US stocks and options? One that has the ability to paper-trade on live prices would be ideal.

I still have access to this:

http://www.optionsxpress.com.au/

It is quite comprehensive. You need to open an account and put in a few dollars to have access to the virtual trading tools and other resources.

I'm using Sonray almost exclusively now. I was concerned that they looked like Opes Prime but it seems OK now.

They have cheaper brokerage and you can buy shares, CFDs, futures and FX on ASX and NYSE. And they answer the phone if you ring.

chilliaa said:

Hi im still comming to grips with writing covered calls.
I understand the theory, but would like to see 'live' prices that i could receive if i did such options.

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Join comsec.com.au for free - they have live option prices. You'll need to sign up as an Options client in addition (also free).

chilliaa said:

Also can covered call be writen at any time of the month?

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yes. Obviously the time to expiry decreases each day & consequently the premium you receive does too

chilliaa said:

Also they termination point is fixed isnt it? in other words, regardless of when i write the call, the expirery date is fixed according to the asx isnt it?

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Yes, Option must expire a the thurs before the last fri of the month. However, while most options expire within a month, many are for longer durations, eg 3 months, 12 months or in specialised cases several years.

chilliaa said:

Also to reduce risk, you can write covered calls only once a share price is approaching your intrinsic valuation. In other words lets say share XYZ is priced at $4.50 My valuation is $5, so i write the covered calls at an excersise price of $5, that way if im hit, it doesnt really bother me.

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Excellent strategy. And once you're happy doing CCs, consider to opposite - naked puts. Receive a premium for offering to buy at (or below) your really good value price. eg Sell puts for BHP @ $25

chilliaa said:

Please note i am looking at this from an investors point of view (hence im more interested in the underlying share values, rather than blindly buy and write a share based just on call premium).

Appreciate any help on this, especially some links where i can see the sought of premiums that could be achieved.

Click to expand...

For more discussion try these thread
http://www.somersoft.com/forums/showthread.php?t=18976

and read the Lawrence book mentioned there.

Sunfish said:

Combine the two facts above and you see that you need $30 - 40 thou to buy/write a contract on BHP.

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While there are advantages you mention of using NYSE, chillias strength is in valuing ASX cpys. In his case he owns the physical shares so he doesn't need '$30-40k cash' to sell a BHP contract.

Player said:

I started paper/virtual trading US covered calls last year (commenced Jan 2008) and fortunately didn't commit real money to the straegy with all the volatility. The problem is that the stock you buy (if you don't already own it) can erode in value far greater (as in the past 18 months or so) than the premium received to use as a buffer on falling stock value.

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Herein lies the great danger. As you hold the shares you are exposed to 100% (97.5% if you discount for premium received) of the down side but you've pre-sold all the up side. I looked at this a few years ago and could not pull the trigger because I always thought there were storms ahead. It is best suited to long periods of slow gains. In volatile times there is a lot of money to be made trading. You can trade penny dreadfuls but you can't write calls against them.

Writing covered calls carries all the risks of normal investing so it can't be tackled with a casual attitude. You must still study markets to decide on the sector most likely to out-perform and then the choices (including indices) within that sector.

I know that I, personally, would not withdraw a pile of money out of an account to go this way if not experienced in the market.

I've been writing options (ETO's) for the past 6 years. I was introduced to the concept at a seminar, then did a lot of reading and study, and I mean lot for about 12 months before i started with real money.

I also strated buying calls and puts in addition to make some money, but did not continue buying/selling, just stuck to writing covered calls.

Started with $8000 initially using lihir gold as the underlying stock. I have grown this portfolio considerably now to almost replacing my wife's income (although she keeps getting promotions and keeps raising my goal).

My advice is to make sure you understand this is a cashflow generation strategy. It is not about long term capital gain - that should be a separate portfolio. Whilst you can increase your capital in using this strategy, understand this is about cashflow.

over the past 4 years I have also been writing put options to on stocks to add another variation to it.

• Be prepared to sell the shares.
• Do not write calls on shares you are not prepared to own
• Be cautious about developing a "thrist for premiums". higher premiums result from more volatile shares.
• Develop a strategy and stick to it - define your criteria, assessment methods, strategy, your actions in response to realised what if scenarios. I learnt this the hard way and chased premiums higher than my target, strayed from my strategy and paid the price.
• Isolate your option writing portfolio from everything else - run it as if it was your business, even with a small amount of initial capital.
• Take steps to limit your downside. Don't be afraid to reduce your profit for the sake of insurance.
• Measure your results against a realistic benchmark and review your results regularly. Keep a journal of why you have written options on what shares - include why you didn't do it on others.

remember stick to your strategy. I can not emphasis this enough.

Happy writing!

OSS

Sunfish said:

Herein lies the great danger. As you hold the shares you are exposed to 100% (97.5% if you discount for premium received) of the down side but you've pre-sold all the up side. I looked at this a few years ago and could not pull the trigger because I always thought there were storms ahead. It is best suited to long periods of slow gains. In volatile times there is a lot of money to be made trading. You can trade penny dreadfuls but you can't write calls against them.

Writing covered calls carries all the risks of normal investing so it can't be tackled with a casual attitude. You must still study markets to decide on the sector most likely to out-perform and then the choices (including indices) within that sector.

I know that I, personally, would not withdraw a pile of money out of an account to go this way if not experienced in the market.

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Agree. That's why in that tanking US market thru all of 2008, I didn't commit any real money......just as well.

Whilst the premium optimisation is far greater in the US due to number of contracts written for the brokerage as compared to the ASX, we are more familiar (or should be) with the usual risks of normal investing in our market here. It would take far more time to research the base stock (underlying) upon which the call is to be written in the US be it DOW or S&P 500

Not for me at this point. In a more trending market, perhaps I'll revisit. Less premium for the safety, however the benefit is more SANF for me. I must also add, I donated $ome in mid to end of 2007 doing put spreads here on the ASX and that shot my confidence a bit, so I'm not as keen to go hard at this strategy right now, even though the volatility (for those that can stand it and have mastered their money mind) is the traders best friend at present.

Interesting thread. I must get over to that HotCopper site and have a look around.

chilli - yahoo finance.

bhp - type in the address bar
on the LEFT hand side up top - "options"

will then load 20min delayed call and put option prices for you.

hope this helps.

cheers,
a.

chilliaa said:

Hi im still comming to grips with writing covered calls.
I understand the theory, but would like to see 'live' prices that i could receive if i did such options.

Can anyone pinpoint me to some sights where i can see the premiums i would get?

Also can covered call be writen at any time of the month? yes - however the closer to expiry you get, the less you time value is - that's part of your delta calcs. however, writing a day before expiry reasonably close to the money will still see a premium (good or bad is up to your definitions of such) and your chances of being exercised are negligible.
Also they termination point is fixed isnt it? in other words, regardless of when i write the call, the expirery date is fixed according to the asx isnt it?
the thursday BEFORE the third friday of every month. US shares is just the third friday of every month.
Also to reduce risk, you can write covered calls only once a share price is approaching your intrinsic valuation. In other words lets say share XYZ is priced at $4.50 My valuation is $5, so i write the covered calls at an excersise price of $5, that way if im hit, it doesnt really bother me.
do you mean you think the stock SHOULD be at $5, and if you own the stock worth $4.50 and write a call then you only get premium + exercised profit IF it reaches $5. there better strategies - buy someone else's $5 call at $4.50 price, write (sell) a $5 call on your own $4.50 stock, profit from the exercised price gap AND the leverage in the option - this is a bull call spread.

Please note i am looking at this from an investors point of view (hence im more interested in the underlying share values, rather than blindly buy and write a share based just on call premium).

a lot of people do this. but using calls to supplement poor dividends or just increase cash flow, when propoerly timed are a fantastic wealth generation tool. people talk about poor BHP and RIO divis - well, wirintg calls and puts + divis would make them near on a CF+ proposition


Appreciate any help on this, especially some links where i can see the sought of premiums that could be achieved.

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have fun!

thanks guys, learning heaps here.

What about another strategy, dont know if it will work or not.
(and obviously will be tied to the volatility of the stock).
let me run through it,
as a stock price rises, the call option prices rises right?
so lets say i have stock xyz, the stock price is $3
my intrinsic valuation is $4
the stock price rises to $3.5
i then write a covered call when the share price is $3.5 and get premium $y
the share price drops back to $3.20
the premium $y will drop again right?
so i could buy it back and make risk free profit right?

again my focus is always on the fundamentals of the underlying share.

another thing, what about dividends?
if its always the 3rd week of the month, then you also have to be careful around the months of march/april and july/aug as this is when most companies trade x dividends.
In the month leading up to the dividend, the share price can rise on anticipation of receiving the dividend (in a normal market, when fear is around nobody cares about the dividend), hence you dont want to be excersised and loose your dividend.

chilliaa,

you need to do some research into options for there is far too much to cover in post online.

In terms of how option prices change in relation to the share price, there is a ratio called delta for each option that shows by how much the option price will move for every $1 change in the underlying security.

eg a delta of 0.5 means for every $1 the share moves, the option in theory should move 50c in the same direction. Delta changes continously

do some research into the "3 Greeks of options"


Be very careful about thinking you can make a risk free profit from any investment, particularly options. There is always risk.

OSS
OSS

chilliaa said:

another thing, what about dividends?
if its always the 3rd week of the month, then you also have to be careful around the months of march/april and july/aug as this is when most companies trade x dividends.
In the month leading up to the dividend, the share price can rise on anticipation of receiving the dividend (in a normal market, when fear is around nobody cares about the dividend), hence you dont want to be excersised and loose your dividend.

Click to expand...

generally, i don't write options on stocks when the dividend is due.
But yes, you need to fully understand the impact of dividends on shares you are writing options on.

OSS

Ol School Skata said:

chilliaa,




Be very careful about thinking you can make a risk free profit from any investment, particularly options. There is always risk.

OSS
OSS

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where is the risk? (not sounding sarcastic, but determined to learn if i am failing to understand it).

If i own the share already (which has its own inherent risks, but for the purpose of call options, lets assume im happy and right in both the share and the purchase price).

the call option is only writen at a price upon which i would be happy to sell the shares anyway based on fundamental criteria (and yes there is one risk here, that positive market sensitive news comes out during the option period which upwardly effects the intrinsic value of the share).

so i write the call option. If the underlying share prices subsequently falls and hence the option 'market price' falls, then i can buy it back on market and make risk free return (or an upfront known return with the underlying shares no longer at risk of being called).

The point here (and please correct me if im wrong, being naive, or there is a better approach) is that i can effectively trade income around the 'grey' area of a shares valuation.

The key for an investor (as opposed to a trader) if they want to henance income with a call option write strategy is:
1) only buy the underlying share when it makes 'investment sense'. This is the most important factor that overrides all others.
2) you will probably have to wait a while before you execute a call writing strategy on the share, as you have to wait for Mr Market to decide he likes the share and hence bids the share up (in otherwords you dont write straight away, because you should have only bought in the first place if you have that margin of safety between the market price and your intrinsic valued price).
3) As the share price moves up into the 'grey area' which is the price range through which you become pretty neutral whether you own the share or not, in other words its approaching your target valuation, you start evaluating call write strategies.
4) You wait for the market to have a bullish spurt, because this will increase the option price, it allows you to execute a strike price that is as close to or higher than your intrinsicly valued price, whilst still receiving a decent premium.
5) if the market pulls back, you can then buy back your call option to realised a known upfront return. This allows you to rewrite the option if the market goes up again, hence you can 'trade' the income.

Does this make commercial sense or am i getting it all wrong somehow?

chilliaa, the main risk above what you are already taking is that if the stock rockets, you will miss out on some of the gains.

I'm using Sonray almost exclusively now. I was concerned that they looked like Opes Prime but it seems OK now.

They have cheaper brokerage and you can buy shares, CFDs, futures and FX on ASX and NYSE. And they answer the phone if you ring.

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It was 6 months or more that I last tried, but Sonray were pathetic when it comes to ASX options. 50% margin requirements on naked puts for instance.

The Thursday expiry is correct for stocks, but not for indicies. You may want to consider options on the ASX200 index and remove stock specific risks.

s_t said:

chilliaa, the main risk above what you are already taking is that if the stock rockets, you will miss out on some of the gains.

The Thursday expiry is correct for stocks, but not for indicies. You may want to consider options on the ASX200 index and remove stock specific risks.

Click to expand...

thanks for that.
As i see it (and its only my opinion, if the stock rockets, well yes you miss out on some of the gains, but it would have been moving well above my view of the stocks intrinsic value anyway, and thus i should be looking at reducing my holding anyway). But your point highlights why i think (for an investor only, not trader), you should only write covered calls at prices that you think are in the 'grey' area with regards to your view of the shares intrinsic value.
ie you should never write a call against a stock that is in deep value territory.

Your second point regarding options on the ASX200 brings me to the next step in my journey about learning option usage strategies.

If i can start to make an income from writing call options, i can use part of this money to buy ASX200 puts to partially protect my portfolio against an overall market correction.


If you look at a whole market cycle:
Basically as the overall market rises, i will be increasingly limited in my ability to buy shares as just a buy and hold strategy (as the margin of safety decreases).

There will be a period when i cant justify further purchases (lower grey area), this is the period when i think using an call option writing strategy will be the most useful to me.

This period will be followed by a period when the market is more expensive (upper grey area), upon which time i would start to look at using ASX200 puts

This period is followed by a period when the market is just too expensive full stop, and this is when i look at exiting the market as a whole.

So basically as i see it, using a call option writing strategy allows me to be in the market for longer, as i receive an increased income stream to justify my risk.