who's out there writing covered calls on their shares?

N

NigelW

This probably isn't the best forum to post this query in...but anyway...

I'm curious as to whether there are many property investors out there who also hold "blue chip" shares which they are writing call options over to generate some additional cash flow?

Perhaps some of Peter Spann's devotees? ;)

If so, is it working well? Are you using a full service broker or purely online discount eg commsec, etrade etc?

Not looking for numbers of course - just some feedback on your views on the strategy, potential pitfalls etc, better or worse brokers etc.

Of course if "buy-writes", covered and naked calls and ETO is all greek to you please ignore this post... :p

Cheers
N.
 
One downside of the strategy is that you do need to start with 1,000 shares (one contract).

I tried it several years ago- $3,000 worth of Davnet.

10% premium in the first month, 7% in the second- and then it crashed (I had no hedge). I haven't dared to try since.

One of the favourites back then was Newscorp- but NAB was more in favour last year. That would require a $30K investment.

Later Spann stuff refers to a lot of protective strategies. It's not a "set and forget"- it does require monitoring. Things can happen depending on the share price- big moves in either direction require measures.

Even if I'd had a hedge on Davnet, the cost would have meant I would still have taken a loss- just a lot smaller loss than I did take :D
 
geoffw said:
One downside of the strategy is that you do need to start with 1,000 shares (one contract).

I tried it several years ago- $3,000 worth of Davnet.

10% premium in the first month, 7% in the second- and then it crashed (I had no hedge). I haven't dared to try since.

One of the favourites back then was Newscorp- but NAB was more in favour last year. That would require a $30K investment.

Later Spann stuff refers to a lot of protective strategies. It's not a "set and forget"- it does require monitoring. Things can happen depending on the share price- big moves in either direction require measures.

Even if I'd had a hedge on Davnet, the cost would have meant I would still have taken a loss- just a lot smaller loss than I did take :D
Click to expand...
This sounds as if you wrote a naked call Geoff. Always risky, even more so on volatile stocks. GOD! Why DVT?:eek:

Not trying to be a smartie here. I have never traded options.

Thommo
 
Thommo said:
This sounds as if you wrote a naked call Geoff. Always risky, even more so on volatile stocks. GOD! Why DVT?:eek:
Click to expand...
No, a naked call is when you don't own the underlying stock. That's super risky. A covered call is when you do own the stock; you can further buy a put to protect the downside.

Why Davnet?

.Because I did not have a crystal ball
.It was one of the few optionable shares available for my price range
.It paid a good premium

Why no hedge?

It ate into my profit :D . Lesson learnt.
 
Good old DVT!! In my trading days (before the tech wreck!!) Davnet was one of my favourites. Made me lots. Was a pity it all had to crash, was fun while it lasted. :p
 
For the uneducated in this area, can you please describe what a covered call is , and an example would be nice?
 
For those with any interest, DVT became UXC and is still trading.....

I've heard some people mention that "DVT is no more" - not so. For the full history, just check the announcements for the last year or two.

Regards,
 
Les said:
For those with any interest, DVT became UXC and is still trading.....

I've heard some people mention that "DVT is no more" - not so. For the full history, just check the announcements for the last year or two.

Regards,
Click to expand...
I kept my DVT (it wasn't even worth selling). But my $3K worth of shares became too small for them to be bothered with, so they were "compulsorarily acquired". A few hundred dollars- if that.

But after selling a unit in Brisbane, a capital loss will offset things a little :D
 
Rixter said:
For the uneducated in this area, can you please describe what a covered call is , and an example would be nice?
Click to expand...
GreatPig said:
See here for an article describing covered calls.
Click to expand...
GP

Not a bad article.

But a few things are specifically US, and there's a few buzzwords in the answer.

I'll try.

If you own shares, there are people who think the price could go up. But they may not want to buy the shares at full value to gain the rise. So they will, in effect, place a bet with you.

They will pay you an amount of money for the right (but not the obligation) to buy that share from you at a predetermined price and time.

So they may pay you, for instance, $1,000 for the right to buy 1,000 NAB shares (which you hold) at $31 on or before the end of August this year (I've no idea what the real premium will be- they fluctuate a lot).

The price of NAB when you take their money is $30.

So if NAB drops in value or stays the same, you keep the $1,000.

If NAB goes up to $31, they can buy those NAB shares from you at $30- but, at that price, after the $1,000 premium you have been paid, they break even.

If the shares shoot up to $35, they've made a motza.

80% of the time, an option expires worthless- so you just keep your shares.

And when they expire, you can collect another premium.

In Australia, a "contract" is for a multiple of 1,000 shares (not a "minimum of 100 shares" as in the referred article). So, if you are using NAB for instance, at about $30 pre share, you will need a minimum of $30K of NAB shares to "write" options.

You are effectively being paid to take a risk.

The dangers:

1. The shares go up greater than the amount of the premium. So you are forced to sell the shares (you will get "exercised").
2. The shares go down. You cannot sell the shares before the time the contract expires.

These dangers can be managed- but I don't have the time nor the skills to manage effectively. But it can be a good cashflow generation technique. 20% return was possible a few years back- probably less now (I don't know).





(even if you're not into shares- options are used in property, so it's good to get the concept)
 
geoffw said:
The shares go down. You cannot sell the shares before the time the contract expires.
Click to expand...
Is that a legal restriction? What's the point of that, since the option wouldn't be exercised if the price fell, and you could always buy the shares back later if you needed to?

GP
 
Hi all,

Geoff has been pretty accurate in his description, though there are one or two other aspects about option trading that need to be covered.

1/ If you sold the shares underlying the call that you sold, you would have a naked position. If the shares suddenly shot up in price after you sold them, you could lose big time on the calls.

2/ Writing covered calls is a strategy promoted by brokers because it generates a lot of commissions. A strategy that has exactly the same risk profile, but less commissions, is to sell a naked put.(you can also do this with a lot less up front money than the covered call option)

3/ As soon as you start talking about taking out "protection" ie buying a put in case the price of the share goes down, then you enter the world of spreads as the cheaper/lower commission alternative.
Far better to do a whole lot of research on the topic of options before you start.

4/ A bit of deja vous here, we have covered this topic in a few threads before. I don't mind going over old ground as I usually end up asking those who started the thread, why they are promoting a non optimum system??

bye
 
Bill.L said:
Hi all,

Geoff has been pretty accurate in his description, though there are one or two other aspects about option trading that need to be covered.

1/ If you sold the shares underlying the call that you sold, you would have a naked position. If the shares suddenly shot up in price after you sold them, you could lose big time on the calls.

2/ Writing covered calls is a strategy promoted by brokers because it generates a lot of commissions. A strategy that has exactly the same risk profile, but less commissions, is to sell a naked put.(you can also do this with a lot less up front money than the covered call option)

3/ As soon as you start talking about taking out "protection" ie buying a put in case the price of the share goes down, then you enter the world of spreads as the cheaper/lower commission alternative.
Far better to do a whole lot of research on the topic of options before you start.

4/ A bit of deja vous here, we have covered this topic in a few threads before. I don't mind going over old ground as I usually end up asking those who started the thread, why they are promoting a non optimum system??

bye
Click to expand...

Sorry Bill, I didn't realise this had been covered before. I'll investigate the naked put strategy.

Thanks for the feedback GeoffW.

I'm still researching various options strategies at present. I was hoping there'd be a few more ppl who could make comments like GeoffW as to outcomes or comment on the pitfalls of the process...

Cheers all
N.
 
Ahhh good ol' Davnet... The first shares I ever bought - tripled my money in about 3 months and got out just in time! Haven't baught shares since though although I'm learning about technical analysis at the moment.
 
Natmarie,

Take a look at Saratoga's Trade Simulator software - it's a tool for paper trading using tech analysis (as well as live trading) & has some nice features for teaching people about technical analysis through running a pretend portfolio with real stocks.

www.saratoga.com.au

Cheers,

Aceyducey
 
NigelW said:
I'm still researching various options strategies at present. I was hoping there'd be a few more ppl who could make comments like GeoffW as to outcomes or comment on the pitfalls of the process...
Click to expand...
See ASX here and here for a good explaination of some possible strategies - there are others!
 
Aceyducey,


Aceyducey said:
Saratoga's Trade Simulator software - it's a tool for paper trading using tech analysis
Click to expand...
I took a quick look at that and it looks pretty good.

What I couldn't quite see though is does it actually include the tech analysis tools for displaying MAs, RSI, MACD, etc. or do you need separate software for that?

I recently downloaded the free version of FCharts and was going to have a play with that. Do you know if it's any good?

GP
 
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