Sale of covered calls (“covered call strategy”)

[yakari1400]

I'm going to allow myself to intervene in the discussion since I'm quoted there (the glory! 😅). What allowed me to understand the options is this post on reddit: https://www.reddit.com/r/investing/comments/hdft5z/how_to_not_get_ruined_with_options_part_1_of_4/

It is obviously in English and quite long, so make yourself a tea and get yourself a good dictionary according to your level. But it is worth it: there are many examples of strategies and all the concepts are explained briefly so that you know where and how to look for information for those who want to delve deeper into an aspect.

Happy learning!

[dividinde]

Thank you Yakari for this reference that I will gladly read. I also have an option open on Novartis for a few weeks and I am in the process of making my first experiences.

[lan33]

Hello Dividinde,

 

I just discovered your forum thread on covered calls. Since last year, how have you progressed on it? I plan to practice covered calls on American stocks in euros, does it work? I am on IB. Thank you

[Soon]

Rule No. 1 for selling calls is to agree to be exercised, therefore to sell your security at the strike value. Basic rule but as always in finance it is the most important.

Selling calls on a portion (instead of all) of the underlying is a way to minimize timing risk because one day the price of your stock will appreciate… and you will regret having sold your calls.

I believe that all the basic principles have been reviewed in the exchanges and your selective approach is (in my opinion) intelligent. As Frouzback mentions, if the underlying vol is low, the premium will be lower. Be careful not to fall into the trap of maximizing the premium by selling calls on growth positions in the portfolio that often have a higher vol.

I would like to draw your attention to the style. You probably read it during your research: if you sell an American style option you can be exercised at any date, however with “European” ones it is only at maturity.

Regarding the bid/offer you can always leave a limit inside the spread (difference between purchase and sale prices) to try to maximize your price. An indication of liquidity is the “open interest” i.e. the quantity of contracts open for a given strike/maturity. The higher this quantity is, the more, a priori, the spread could be reduced.

If you want to minimize your transaction costs, a 3-month maturity is also a good compromise to maximize the time value change factor and not be constantly processing. This obviously remains a general principle.

Finally, the same option selling strategy can be implemented if you want to buy securities by selling puts. The yield can be interesting when the vol is high. To understand well before trying because this has already ruined some people… (just like the sale of uncovered calls)

[Author]

Posts