Covered Calls Question

A lot has been said about options for stocks here. Can anybody provide a comprehensive answer to the question: Is it possible to write covered calls on: 1. currencies, 2. commodities, 3. indexes? Thank you for your help.

Yes it is, just buy the FTSE future and sell calls against it. Buy Crude futures and sell calls etc

However you're better off just selling naked puts, it's exactly the same trade and cheaper to do.

All very possible to do, as anley said, but you need a very good reason for doing it! The main reason for systematic option writing is to sell volatility, i.e. where you think future volatility will be lower than that implied by current option premia.

anley said:

Yes it is, just buy the FTSE future and sell calls against it. Buy Crude futures and sell calls etc

However you're better off just selling naked puts, it's exactly the same trade and cheaper to do.

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Selling naked puts is not exactly the same trade.

The naked put position has a limited upside risk and an unlimited downside risk.

The covered call, as the name suggests, limits your downside risk.

They are therefore quite different trades.

Blairlogie said:

Selling naked puts is not exactly the same trade.

The naked put position has a limited upside risk and an unlimited downside risk..

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Selling a naked put does not have an unlimited downside risk. It has a maximum downside risk of EXACTLY the strikeprice of the series sold less the premium received.

TheBramble said:

Selling a naked put does not have an unlimited downside risk. It has a maximum downside risk of EXACTLY the strikeprice of the series sold less the premium received.

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technically correct......my point being that the risk profile of the 2 suggested strategies are quite different.

Absolutely agree. Just didn't want anyone being put off selling naked PUTS - I might want to be on the other side!!!

The risk profile is exactly the same give or take a few points.

A market cannot go below zero therefore ALL short puts have a maximum risk. Short calls however have an unlimited risk because markets can go up forever. Both trades are limited risk/limited reward.

Covered calls are in many ways a perfect marketing trick by the brokers to generate commissions and nusiness because clients have to do two trades. And the laughable thing is that many covered call traders think that people who sell naked puts are crazy, loose cannons.....hahahaha

If you don't believe me then plug the 2 trades into Hoadley and see what the risk profile looks like, or better yet read from the master himself Charles Cottle (Page 11-12) of this guide. http://www.cashflowheaven.com/cws.pdf

anley - I totally agree. Long stock with a short call is a synthetic short put. Only differences will be in dividends and dealing costs. We've been here before actually

http://www.trade2win.com/boards/showthread.php?t=5943&page=1&pp=15

Thank you all for responding to my question. I wonder if there is any strategy that can be implemented to limit a risk when writing covered calls? Any ideas?

Kot - you could use some of the premium taken from the short calls to buy long puts - creating a "cap and collar". No real point in creating this position tho' unless you already own the shares and are unable to sell them for some reason, but want to limit the downside - to lock in gains already made for instance.

Given that long stock and short call is a synthetic short put, and you like the idea of a long put underneath a covered call, why not just sell a put and buy a long put underneath to create a credit spread? This is a bullish position because you keep all the credit provided that the underlying doesn't fall below the strike of the short put.

You can adopt a bearish stance in the same way with a call credit spread - i.e. sell a call and buy a call higher up, thereby keeping all the credit provided the underlying doesn't rise above the strike of the short call.

Kot, no not really because in this game the more risk you except the more you'll be paid (if the trade goes in your favour).

So you're really asking for the impossible, to make a 'good' return for almost no risk. And even if you could find a strategy for doing this then when you did the trade in real time it would likely be very uneconomical due to all the bid-offer spreads you'd have to pay away,

If you only remember one things about options it's that they're very expensive to deal and in my experience trading costs are normally the dominant factor of whether people make money over time or not.

Agree entirely with the above two posts. Before getting into the detail of any strategy, have a look at the b/o spreads, open interest and dealing costs for some of the instruments you are looking to trade. The figures are quite shocking. Trading costs are pretty high and liquidity can be pretty low. These factors can make a lot of option strategies almost impossible to implement.

Thanks again, guys. So, Rainmaker, does it mean that sometimes when one wants to write a covered call there may not be any buyers? Is this situation common in option trading?

Kot

Absolutely correct. The situation varies widely as you move down the cap ranks and across the expiries and strike prices. What is more worrying is the variation in spreads.

Kot - spreads on UK equity options can widen enormously and remain wide for some time, especially in the more illiquid issues. I would strongly recommend that anyone new to options starts with Index options. At least these are very liquid, spreads are tigher 9and if they widen, it is only for a short time which you can usually sit through), not subject to takeovers, profit warnings or complex alterations with special dividends. And they can be traded based on european style settlement so that you cannot get assigned early.

Hello, again. I have two simple questions that I could not find answers for in literature about options. In fact it looks like most sources just copy each other. Anyway, talking about American style options:

1. Let's say I buy 100 shares of ABC stock for $9.84 and I want to sell a November covered call for $1.00 with a strike price $10.00. While I am doing it the stock jumps and I end up buying the stock for $10.00 or more and selling the call for, say $1.10. Now, my question is - in this situation at what price am I likeley to get assigned if the stock continues to rally? Or will the broker close my position immediately? Are there any implications that I have to consider?

2. Let's say I buy 100 shares of CBA stock for $10.92 and I want to sell a November covered call for $2.00 with a strike price 10.00. This time everything works out as planned. Is it possible to determine exactly at what price I will be or am very likely to be assigned or there is a zone between price X and price Y where it may happen?

Thank you for your help.