Options trading

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  • IntensiveCareBear IntensiveCareBear 
    Status: Physician
    Posts: 235
    Joined: 12/22/2018

    … safer options   covered call.    You’re owning the stock and predict a certain growth and insuring that growth with options.– hence CAPPING your top end.   Counter argument, if you’re spending time to ID a good stock, why cap the potential?    ie – not worth your time/energy beyond 3 fund strategy and your fun account…

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    This not always true. Many guys would add a lot of growth (reinvest the $ flow) in younger years and a lot of trickle cash (keep call fees and divi) by selling calls on their index ETFs in a 3 or 1 or etc index fund portfolio, but they just don’t know how.

    It is short sighted to say covered calls miss out on gains. They are free money when they expire worthless, and they lock in realized gains when they are exercised. Nonetheless, that “cap your potential” aversion seems to persist. There is no reason to boo hoo if you have a stock at $45, sell the $48 one month call for $1, and it goes to $50 by expiration. You still get $48+$1 = $49 (for a gain of $4… almost 9% in the month, realized gain!), and you can buy it for $50 if you still like the stock that much (or set a covered put for $48 or $47, etc) or you can buy something else. If you’d simply stayed long on it, you probably would just hold it and hold it as it started $45, rose to $51, dropped back to $47, and kept see-sawing anyways…. no reason not to get consistently paid for having it. Everyone seems to think they would sell at the peak or that the rise is eternal, but it never works that way.

    The biggest obstacle to being effective with selling calls is avoiding getting attached to your stocks (or indexes) and to have a sizable stable of stocks and indexes that are all quality ones which are fairly suitable for maintaining your income stream. There is no way to ID amazing stocks; it is not an exact science. Even large investment companies with ability to travel to corporate locations, have smart number-crunchers eval data, etc struggle to accurately rate and buy equities. No major hedge fund makes their money by going long on things; everyone’s crystal ball is cloudy as heck. For this reason of unpredictability, buying the calls back once they are ITM since you got married to that stock’s potential is generally unwise since you already made profit and would just be switching to take a slight loss in order to chase something on the way up. I usually just begin to plan what other stuff on my radar is down or at better value so I can buy with the incoming $ that I’m about to get from a call being exercised. It only takes a few days per month. Of course, there is no reason to sell calls at all for any stock/index you own where the price for the options isn’t to your liking or if you are highly bullish on it in the short term… you can always just stay long on it, collect dividends, and remain long until the price for selling it or selling calls is something you can be happy with. You can even buy calls if you want to be really bullish, but that’s a totally different strategy.

    …The whole concept of selling options is basically just letting others gamble on their ability to forecast time and momentum. Sellers don’t have to be right on directionality or time to win, but the call/put buyer is banking on being correct about both directionality AND time. Time is the hard part… or the easy part, depending which strategies you employ. Selling covered options is the opposite of market timing and buying options is the ultimate example of timing. It’s why 75-80%+ of options expire worthless… but some of the ones that do hit are quintuple grand slams.

    "Hmm, that sounds risky." - motto of the middle class

    #230953 Reply
    Avatar Tim 
    Status: Accountant
    Posts: 3030
    Joined: 09/18/2018

    “No major hedge fund makes their money by going long on things”?
    Talk about PE and VC’s and targeting “distress situationss”. Those are buy side plays, aren’t they?
    Long is the opposite if short. Lot’s of longs leverage to juice returns.

    #231003 Reply

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