generating cashflow through shares

[Ol School Skata]

...as well as what the brokerage costs involved were.

Commsec Brokerage prices to buy the shares start at $19.95 for trades up to $10K, $29.95 up to $25K or 0.12% over $25K (internet preferred option)

I currently use Commsec's Protrader to conduct my option writing. (Protrader software came free as long as i do one option trade per quarter)

To do this online costs me $34.95 in brokerage to write the call as well as pay $1.12 per option contract (usually a contract is for 1000 shares).

eg to write put options on 5000 WBC shares will cost me $34.95 plus $5.60 (5 contracts x $1.12) or $40.55 in total.

Happy to share my knowledge with you - just send me a pm

OSS

 

[Sunfish]

Writing covered calls is difficult on the ASX. As you say, you need 1,000 shares to write a contract and the only shares liquid enough to trade reliably are BHP, NAB and a few others so you are talking about $30-50k stake.

The one or two % "profit" when selling the contract is eaten up if you are exercised. You need to sell your parcel of shares and buy another to do the same again next month.

On the NYSE an options contract is only 100 shares and there are thousands of liquid shares and indexes you can trade, with lower brokerage and you pick up a better premium.

If you want to go that way, take the time and effort to learn how to trade the NYSE.

Sonray are brokers through which you can trade the US and even buy CFDs on their market, which Yanks can't do. None of this is easy and CFDs are scary. If you really want to know more PM me.

 

[rossv]

Hi karina,

writing covered calls is not a bad strategy, however if you extend it to another level it becomes even better imho..

if you sell a call option, say on a monthly basis until exercised you get income... this is good

eventually you will be exercised, you get cg ... this is good

risk at this point is you may miss out on some growth.

then, sell a put option, get income monthly until exercised

you get to buy shares back at a lower price... this is good

risk at this point is you may have to buy shares above market value.....

then.... sell a call option, and start all over again..

this strategy beats the hell out of just buying shares.

then you could go a level further...... and never buy or sell any shares just sell options and buy them at the same time to restrict your potential loss.

eg: i have a 3 week trade on at the moment with a capital risk of 20K and a potential return of 19% .... =329%pa? (my maths is not good)

when i say return i mean return on risk.

since i receive money for selling a put and spend less for buying a put ROI doesn't give a fair return when considering risk.

geez... does that make any sense

better get another red.....


rossv

 

[karina]

thanks for all the responses.

Looks like its worth the effort, I'll need to learn how to do this, would be great to generate some cashflow.

 

[Ol School Skata]

Rossv,

That as you have outlined has pretty much been my strategy over the past year. Started with covered calls, got exercised, then started writing puts over another stock...still writing puts at the present. This has provided some sound returns to date.

OSS

 

[Bill.L]

Hi all,

I can't resist this thread any more.

The risk profile of buying shares, then selling call options is exactly the same as just selling a put option in the first place.

However the number of transactions, as well as the amount of money you have to invest is a lot less (for selling the put option strategy).

If you do not understand this, then you should not consider trying to use options as a strategy to gain income.

This has been raised before a couple of years ago. The same rules still apply.

Anyone using the covered call strategy over the last couple of years would have made a good income, but been called out several times. Just holding the same shares over the last few years is likely to have provided greater returns because of the bull market.

bye

 

[Peter Spann]

Yawn

Bill
Do we have to have this conversation again?
PS
P.S. Will people stop using my name and JM in the same sentence!!!

 

[Bill.L]

Hi Peter,

You are right, it is old ground.

Do you care to try and prove which part of the following is incorrect???

The risk profile of buying shares, then selling call options is exactly the same as just selling a put option in the first place.

However the number of transactions, as well as the amount of money you have to invest is a lot less (for selling the put option strategy).

You choose a share and we will use current purchase price and option prices, maybe something tomorrow? Maybe Zinifex?, that has already been used as an example in this thread.
We can look at cost, and potential risk for the same number of shares. A simple buy/write compared to a naked put.
If you want to add 'protection', then we will do it for BOTH strategies. OK?

By the way, it is good to see that you are still following this forum. I look forward to your posts on all topics.

bye

PS. I'm still in a slight state of shock, as I spent an hour and a half this morning on the side of the road with a truck driver who had just had a major accident. He was sent by air ambulance to hospital with life threatening injuries. I do not know if he survived. It kind of puts our debates/arguments into a bit of perspective. I was first on the scene of the accident (a country road).

 

[evand]

Hi, my first post. love this forum.

I have been using a similar strategy to Keith in his excellent thread on loe. It differs in the following areas:

I use a LOC to top up my share trading/investing funds instead of margin loan, only 25% max tho.

I trade/invest in shares using a combo of fundamental analysis and technical analysis for a return of 40% - 50% pa. I try to double the index every year and have been exceeding that without too much effort. I live on/reinvest capital growth of shares and the divs are a bonus.

I think my method requires much less work than options, CFDs etc.

Also, i'd like to mention that if you want to live on equity it helps to pay off all non deductible debt, including ppor mortgage.

Thanks

Hi karina,


this strategy beats the hell out of just buying shares.



rossv

 

[Sunfish]

Just holding the same shares over the last few years is likely to have provided greater returns because of the bull market.

bye

I've got to agree with that but I'm curious about writing naked puts and how it's as good as covered calls. Care to explain a second time or post a link to the previous discussion?

 

[Peter Spann]

Do you care to try and prove which part of the following is incorrect???

OK, I'll take a completely different tack.
You are RIGHT!
How's that?
I think the mistake that I have made in the past is to argue with you when intrinsically I know that the assertions you are making are correct...
If, and this is a big IF, we were talking about professional traders or unemotional humans you would be spot on because the assertions you make are 100% accurate in theory, but you leave out a significant (and what I believe the most important) factor - human psychology.
People simply react differently when things go wrong in a written put position to when they go wrong in a written call position - they shouldn’t but they do.
Take it from me – I am on the other side of the transactions 300 times a day (ie I own and operate a stock broking business).
We have never had a default from people writing calls. We watch written put positions like a hawk because of the weird behaviour traders display when the markets move against them – and the high proportion of “skips” (people who don’t cover their margin and skip out on paying) we get with written puts – it costs us heaps (the broker has to cover the position regardless of if the trader fronts with the money).
The traders don't seem to make the same mistakes trading out of written call positions as when they are trading out of a written put position gone wrong.
And THIS is where they seem to make their losses.
Writing puts is great if you are impassionate, and impervious to your emotions but it takes experience and a certain personality for that.
And here we are not talking with / to / about experienced professional traders (and by the way I have seen all sorts of "aberrant" behaviour from the pro's when things start to move seriously against them too).

 

[Peter Spann]

I'm still in a slight state of shock, as I spent an hour and a half this morning on the side of the road with a truck driver who had just had a major accident. He was sent by air ambulance to hospital with life threatening injuries. I do not know if he survived. It kind of puts our debates/arguments into a bit of perspective. I was first on the scene of the accident (a country road).

Bill,
This happened to me last year - except it was with a motor bike. I still can't say I have recovered totally emotionally from the impact of having somebody effectively die in my arms (while he died in hospital after being medi-vaced out he lost consciousness while I was with him and never regained it).
I hope things turn out for the better with your traveler.
PS

 

[WinstonWolfe]

PS. I'm still in a slight state of shock, as I spent an hour and a half this morning on the side of the road with a truck driver who had just had a major accident. He was sent by air ambulance to hospital with life threatening injuries. I do not know if he survived. It kind of puts our debates/arguments into a bit of perspective. I was first on the scene of the accident (a country road).

1.5 hours in a situation like that is significant. Visiting the guy in hospital, if not too far away, and if he is conscious, would benefit you as much as him.

 

[Bill.L]

Hi all,

Peter, I agree with you completely about the human psychology factor.

It is usually because someone using the naked put strategy instead of a covered call puts up so much less money in margin that they overtrade. (ie sell 5 puts instead of selling only one that they should be, given the account size)

I see the reason why most people do not consider the covered call strategy as risky as the naked put, is because they still have their shares, even if the value has gone down. Most people tend to think they have not made a loss while they still hold on to them (and given the bull market of the last few years they have been mostly correct).

I am not an advocate of using the naked put, nor the covered call strategy, I have only been trying to show that the naked put strategy is a cheaper (and therefore potentially more profitable one) with the same risk profile as the covered call strategy.

For others, who do not know what I am talking about, I'll try to give a quick (very rough) example on the now defunct stock Pasminco, and ignoring bid/ask spread as well.

Shares trading at $1.00
$1.00 call option 10 cents.
$1.00 put option 10 cents.

Covered call strategy. Buy 10,000 shares cost $10,000. Sell 10 call options equals $1000 in 'income'. Your risk without a protective put is a $9000 loss should the shares go to $0.

Naked put strategy. Sell 10 $1.00 put options. You receive $1000 in 'income'.
Your risk without a protective put is that the shares will be put to you at a cost of $10,000. As you received $1,000 in income, should the shares go to $0 your maximum risk is $9000.

As Peter states..

People simply react differently when things go wrong in a written put position to when they go wrong in a written call position - they shouldn’t but they do.

I agree again, which is why the many advertisements in the papers advocating how much you can make trading options for only a few minutes work each week, is really just taking lambs to the slaughter.

My take is that all trading of options should only be done on a fully professional basis. People should become fully educated by both reading and studying option behaviour before they try to implement ANY option strategy. Even after this, thinking that the market will just give you money week after week, with virtually no risk or work, is very naive.

bye

 

[Bill.L]

Peter and Winston,

With the accident victim, I spoke with the 2 ladies that were helping me at the time that we should all go and visit him in hospital after he had recovered a bit, for our own sanity/peace of mind. I intend to do that.
Last I heard was that he was in a critical but stable condition in the Alfred Hospital (almost 200 km from here).

bye