Investing

Writing Covered Calls

  • Last Updated:
  • Aug 10th, 2017 12:17 pm
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[OP]
Newbie
Apr 8, 2017
94 posts
23 upvotes

Writing Covered Calls

Hello all

I am a newbie when it comes to option trading but i was thinking of writing Covered Calls for my long term holdings that falls under the following criteria:

1- Bought at a bargain price
2- currently overvalued

If the option is exercised i will collect the premium and the capital gains.

The only drawback i see is limiting the upside in case the stock shoots up.

I also don't understand the fees of writing the calls. I know there is a fee for owning an option but is there a fee other than the $9.99 for writing one?

Cheers
9 replies
Member
Apr 22, 2014
386 posts
177 upvotes
Edmonton, AB
If the option gets exercised before you close it out, you will be hit by a fee and the amount can vary based on the number of contracts and broker. Sometimes you can get assigned without even knowing why. You have to consider dividend risk if you are doing this on a dividend paying stock.

Make sure you use liquid stocks and avoid Canadian stocks. The option market in Canada is too thin. Also, if you are paying $9.95 a pop, that can suck up a whole lot of the premium if you are trading small.

This strategy always sounds great but I find it is tough to implement. One of the downsides that people don't think about when they sell covered calls is what happens when the stock goes down. Sure you collect the premium, but you have to keep moving your strike further and further down. Eventually you will get called away at a price you hate.

Also, in this market, you'd have basically gotten rid of everything you like at bottom basement prices. If you can keep the emotions out of it, perhaps it can work for you but it's one of those things that is way easier said than done.
Deal Addict
Jun 27, 2007
3092 posts
492 upvotes
I have been writing covered calls for awhile now, and in general I would agree what philland said, except...
philland wrote:
Jul 15th, 2017 1:33 am
If the option gets exercised before you close it out, you will be hit by a fee and the amount can vary based on the number of contracts and broker. Sometimes you can get assigned without even knowing why. You have to consider dividend risk if you are doing this on a dividend paying stock.
selling options for $10++ per transaction is not smart. IB is one of the cheapest brokers, save $$$ - if you provide liquidity, there would be zero cost to sell. If you take liquidity, the fee would range from 0.5 to 2 per contract (depending on the exchange). No assignment fees too.
In regard to dividend risk, IB would notify you 2 days BEFORE ex-date with their recommendation. I normally check out remaining extrinsic value and if it's less than dividend, you're at risk. In that case, roll to the next expiry.
Make sure you use liquid stocks and avoid Canadian stocks. The option market in Canada is too thin. Also, if you are paying $9.95 a pop, that can suck up a whole lot of the premium if you are trading small.
Agree re: Montreal exchange. Liquidity is just not there...
This strategy always sounds great but I find it is tough to implement. One of the downsides that people don't think about when they sell covered calls is what happens when the stock goes down. Sure you collect the premium, but you have to keep moving your strike further and further down. Eventually you will get called away at a price you hate.

Also, in this market, you'd have basically gotten rid of everything you like at bottom basement prices. If you can keep the emotions out of it, perhaps it can work for you but it's one of those things that is way easier said than done.
not sure why would one move the strike price down in the crash scenario. If the strategy to be invested and reduce cost basis when stock overvalued (at the top of its range/channel) AND implied volatility is there (eg TSLA right now), by all means, sell calls. On the other hand, when a stock is down 10-20-30% and no longer overvalued, makes little sense to sell calls as risk of assignment too great. You should be buying calls and selling puts at that time (eg synthetic stock).

VIX below 10 means insurance is too cheap. Take advantage of it if you're not planning to liquidate your portfolio.
After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
Member
Apr 22, 2014
386 posts
177 upvotes
Edmonton, AB
dlhunter wrote:
Jul 15th, 2017 4:25 pm
selling options for $10++ per transaction is not smart. IB is one of the cheapest brokers, save $$$ - if you provide liquidity, there would be zero cost to sell. If you take liquidity, the fee would range from 0.5 to 2 per contract (depending on the exchange). No assignment fees too.
IB charges commissions per contract regardless of liquidity on their fixed plan. I know they have a tiered plan but don't know much about it.

https://www.interactivebrokers.com/en/i ... p=options1
dlhunter wrote:
Jul 15th, 2017 4:25 pm
not sure why would one move the strike price down in the crash scenario. If the strategy to be invested and reduce cost basis when stock overvalued (at the top of its range/channel) AND implied volatility is there (eg TSLA right now), by all means, sell calls. On the other hand, when a stock is down 10-20-30% and no longer overvalued, makes little sense to sell calls as risk of assignment too great. You should be buying calls and selling puts at that time (eg synthetic stock).
It looks like you are making assumption on when he will or won't sell calls. The point is, if you have a position you are constantly writing calls against and the underlying continues trending downward, you will have to keep moving the strike down in order to collect the same amount of premium. Eventually you will get called away for a loss. Maybe the premium you have collected in that time covers the loss and maybe it doesn't. It's just something to consider and I find a lot of people don't when they decide to sell covered calls.
Deal Addict
Jun 27, 2007
3092 posts
492 upvotes
philland wrote:
Jul 15th, 2017 4:54 pm
IB charges commissions per contract regardless of liquidity on their fixed plan. I know they have a tiered plan but don't know much about it.
I'm on the fixed plan too, but I have a habit of checking tx fees and I did see few times zero cost when I was selling
It looks like you are making assumption on when he will or won't sell calls. The point is, if you have a position you are constantly writing calls against and the underlying continues trending downward, you will have to keep moving the strike down in order to collect the same amount of premium. Eventually you will get called away for a loss. Maybe the premium you have collected in that time covers the loss and maybe it doesn't. It's just something to consider and I find a lot of people don't when they decide to sell covered calls.
no assumption, read OP's post
1- Bought at a bargain price
2- currently overvalued
when stock down 20%, in most cases, it's no longer overvalued (unless it goes to zero)
another thing - when stock falls, implied volatility spikes and to collect the same premium, you can sell lower delta call. Eg, I normally sell 30 delta, but when IV spikes, I may collect same monetary value for 15 delta.
Anyway, when selling covered calls, you should be OK to sell underlying at strike price. While I know what you are talking about, I am saying don't aggressively roll down your calls. Sometimes doing nothing is better than chasing pennies.
After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
Member
Apr 22, 2014
386 posts
177 upvotes
Edmonton, AB
dlhunter wrote:
Jul 15th, 2017 11:13 pm
I'm on the fixed plan too, but I have a habit of checking tx fees and I did see few times zero cost when I was selling
Not possible.
dlhunter wrote:
Jul 15th, 2017 11:13 pm
when stock down 20%, in most cases, it's no longer overvalued
That's an assumption.
dlhunter wrote:
Jul 15th, 2017 11:13 pm
another thing - when stock falls, implied volatility spikes and to collect the same premium, you can sell lower delta call. Eg, I normally sell 30 delta, but when IV spikes, I may collect same monetary value for 15 delta.
Anyway, when selling covered calls, you should be OK to sell underlying at strike price. While I know what you are talking about, I am saying don't aggressively roll down your calls. Sometimes doing nothing is better than chasing pennies.
I'm not even talking about aggressively rolling. Even if it expires worthless and you want to put on another, chances are you are putting it on at a much lower strike price.

The only reason I bring it up is because I always see people saying "if it goes down I am good because I collect the premium" without thinking through their next steps and what happens if it continues to decline.

Anyway, I think we are mostly on the same page.
Deal Addict
Jul 3, 2006
1063 posts
159 upvotes
IB cheapest way to play options game ..Expressive way to play stocks if your buying a lot of shares in one order
[OP]
Newbie
Apr 8, 2017
94 posts
23 upvotes
Thanks for the advice everyone.

I will have to find a cheaper broker to start playing with options but till then i will maintain and add to my long positions :)

Cheers
Deal Addict
Jun 27, 2007
3092 posts
492 upvotes
dlhunter wrote:
Jul 15th, 2017 11:13 pm
I'm on the fixed plan too, but I have a habit of checking tx fees and I did see few times zero cost when I was selling
philland wrote:
Jul 16th, 2017 12:03 am

Not possible.

Hey Phil, take a pill ;) Notice last tx I got paid a little ;) yeah, thank you, IB Grinning Face With Smiling Eyes

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After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!
Member
Apr 22, 2014
386 posts
177 upvotes
Edmonton, AB
dlhunter wrote:
Aug 10th, 2017 12:09 pm
Hey Phil, take a pill ;) Notice last tx I got paid a little ;) yeah, thank you, IB Grinning Face With Smiling Eyes

Image
Interesting. I don't understand how that would happen. They charge $0.70 per contract.

edit: It looks like maybe you got a BATS rebate for adding liquidity.

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