Dear All,
I am interested if anyone here ever use covered calls (writing a call option) against shares that they owned.
1. I am interested to find out if anyone here ever lose money from writing covered calls.
2. I also interested to find out if anyone here ever make money from writing covered calls to generate income?
Thank you.
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum]Chan,
I know lots of professional traders and none use this strategy.
I do know “investors” who have long term holdings, who write calls for additional returns when the stock is downtrending/sidways.
As a trading vehicle….hmmmmmmmmmm….Brokers like it cause it generates additional brokerage. Wealth seminar speakers like it because it sounds all so feasible and clever. As a trader, I don’t like it one iota.
When you think about it, why would you buy shares so you can write a call. If you think it is going to go up, why limit your upside, why not just buy the share? If you think it’s going to go down…well, you’ll collect the premium but take a hit on the shares.
Again, for long term share holders, covered calls can be quite good…in certain circumstances.
Well I’m outa here, before I get busted by Steve for talking shares! :-x
Chan
We “did” covered call options for approx 2 years….
when the price of our shares was at or above what we paid for them, we had a good monthly return….
When market is flat or downtrending you wont make a return….. simple as that….
When we did get a return we averaged 4%-5% per month……
You also need to remember the one drawback is not really being able to leverage your $$$$$…. so. if you have 50k to invest, you get a return on the 50k….. if you used that 50k for a property, which is leveraged, obviously you get a net return on a larger $$ amount…..
We found it too unstable an income stream…. it does work, but you have to fine tune the strike level, so that if you DO get called in, you don’t lose your overall capital…..
Cheers
Scott
Pelican Investments
http://www.pelican-invest.comScott
I think you can now get margin loans on shares that you are writing covered calls on. ANZ from memory. But I agree with your point, you can not gear them anywhere near you can with property
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I’ve made some – and lost some.
I bought some Telstra shares (and hadn’t sold them when they were at $8- d’oh). I wrote about 5 months worth of calls before I got greedy and got called away – which didn’t really bother me as I wasn’t that fussed on holding onto them – but the premiums helped prop up the return on them.
Cheers
MelTerry,
Unless costs have dropped since 2 years ago, it’s not worth the cost to do it…. The banks make all the profit and not the option writer….
Did the sums… was gonna borrow 150k…. but ended up that with the fees and interest, I would get nowhere !!!
I think, as we all know here ( well I hope anyway !!! ) Leverage is the best way to go to grow your nestegg…..
Cheers
Scott
Just to clear up a common misconception:
You can leverage shares and commodities to the hilt.
For instance, via index futures I can attain an effective LVR of about 97% on a theoretical basket of shares.(NB: futures don’t *really* work that way but same general idea)
Other derivitives (CFD’s) have an LVR of 90%.
Via margin lending, LVR’s are between 40-75%.
I would like to go to great pains to point out here that we are talking about a trading strategy. This is a business proposition as opposed to an investment.
For standard buy and hold investing, we all agree property is king….providing the world economy escapes a very severe shellacking as proposed by Prochter, Dent, et al.
But for buying and selling short/medium term…give me shares/commodities any day…and/or derivatives thereof.
Dear All,
Thank you very much for sharing your experiences and knowledges.
Covered Calls is the strategy that Peter Spann used and I am exploring and learning all the possible options in the share market where I am not so familiar with.
I traded and invested in shares before during the dotcom boom, but that’s not count because I went in blind folded back then.
I know that covered calls will generate income if the shares go up, side way, or go down just a little bit. But if the shares heading south very fast within a month then you will lose a lot of money.
Wayne, I agreed with what you are saying and I also checked out your website a couple weeks ago. It’s great.
Thank you one again.
PS. I can’t replied to you guys as fast as before because can’t access from work.
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum]Chan, just for fun i wrote a covered BHP call and also bought a six month put. Lo and behold BHP took a dive and i was excersised, i then waited untill the put went up and up and then sold it. Just broke even when all was said ‘n’ done. [cigar]
just a thought….Wallflower,
If you wrote a covered BHP call and BHP took a dive, how can you be exercised? The buyer of your option will expired worthless.
?
Kind regards
Jet Dollars
[Retire Young, Retire Rich] [strum]The key to coverd call options is finding the right balance ( i.e. the strike price )
We always made sure that even if we did get called in, we would make money on the deal….
If you are going to do this, YES, DEFINITELY go out and do the courses….
It’s not a hard thing to do, but experience tells us that you can’t expect income every single month you write an option, if it’s worth writing at all, at times….
Cheers
Scott
Scott
Pelican Investments
http://www.pelican-invest.com>>We always made sure that even if we did get called in, we would make money on the deal….<<
??I can not think of an instance where you would lose money if excersized…unless you are already carrying a substantial loss on the underlying.
>>experience tells us that you can’t expect income every single month you write an option, if it’s worth writing at all, at times….<<
AMEN!!!!!!! The “gurus” (and I use that term very loosely) who claim a 3-10% income PER MONTH are lying through their teeth.
As Scott points out, when volatility is low, OTM calls won’t be worth a pinch of goat s**t. They’ll be so cheap it won’t be worth writing them.
wayne & Scott,
After doing quite a lot of researches and learning I feel the same as what you guys said.
Writing Covered Calls seem stop you from potential gain if the shares market is heading north and will lose a lot of money of the shares market heading south.
ASX run a Covered call portfolio study:
http://www.asx.com.au/markets/l4/CoveredCallProjectResults_AM4.shtm and I can see the different between normal investing and writing covered calls.If the options is exercise and you want to buy that share/s back then you will lose money for that money because the different is quite a lot in long term.
Thanks guys and I will continue to do more study into it.
Kind regards
Jet Dollars
[Retire Young, Retire Rich] [strum]
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