Hey guys, I need help finding good articles on covered call options that have been published within the last year. Thanks in advance.

more specifically, the relationship between calls and writing them.

Not sure what you are trying to learn, but just in case, do you understand that if you are a long term investor selling covered calls you are selling your upside?

I've heard of a study saying that covered call writers perform better than ordinary stockholders over the long run. I've sorta seen this from my own experience with covered call writing - it's not rare that I get a >1% monthly return while only selling my upside above a 20 or 30% return on the stock. Think about that - writing seems pretty lucrative. If anyone knows of any such article/research, please throw it my way. I suck at searching and haven't been able to find anything.

If it were true that cc writers were more profitable, it means that calls in general are overpriced. I see no evidence of this. You have been lucky so far but you have a small sample size. Someone else is likely complaining that their favorite long term hold just spiked thirty percent and got called out from them, costing many times more than the premiums earned.

well, here's what I'm saying - the stocks I'm writing covered calls for can rise 30% and still won't reach the strike price - and I'm being paid about 1 or 2% a month. If I wrote within 10% of the strike price I could get 5 or 6%. I have no hard data to support it for you, but I wouldn't be surprised at all if calls were overpriced for some stocks.

Depends on the mkt environment and if you are hedging the stock and options 1:1

If 1:1, then why not just sell deep puts outright? (I guess it makes sense if there are capital recs for retail customers)

A covered call is equivalent to shorting a put but probably will have higher transaction costs and tie up more capital. Shorting the put is thus probably a better way to go but not a good way to go IMO.

Can you name the stocks you write against? It sounds like you have some very volatile holdings, once again I doubt there is a free lunch. You are getting big premiums because the risk of getting called out is relatively high.

For example, KO is $54. The October $57.50 calls last traded for twenty cents. That works out only to about 0.37% premium (not counting transaction costs) for almost 6 weeks exposure to only a 6.5% move. Of course KO is a low volatility stock that rarely moves, but every so often some news will drive it up much more than 6% in a short period.

Some expensive premiums are for stocks with binary futures, for example a drug company that has a blockbuster drug in testing and the test results will either make the company worth zero or 2x current price. If you owned a company like that covered calls wouldn't make much sense because you'd be giving away most of your upside while retaining all of the huge downside risks.

I do believe that some options are mispriced and smart options traders can be significantly +EV if they know how to find specific opportunities. But if you are just writing calls because you own the stock, odds are the price fairly reflects the best estimates of future volatility.

I agree with what you're saying, mostly. In fact, I almost totally agree. I'm just going out on a limb though and conjecturing... can anyone show me any data that options pricing as it exists in the market or the options pricing models aren't biased one way or the other?

Just for reference, what dictates option pricing? It's my understanding that a market maker sets prices according to an options pricing model like Black-Scholes and then that price is influenced by supply and demand. I could be way off though, I don't know the inner workings of the options markets.

So, what is to say that the black-scholes model, while applicable to the stock market as a whole, might not over or under-price options for a specific equity/industry? Or maybe the supply and demand that dictates which way option prices go is skewed one way or the other - either creating returns that are higher than justified or lower than justified - sorta like when the stock market has had periods of relatively low P/E's in the past. Relative option prices wouldn't be affected, but the overall premiums might be off.

Anyhow, just some random thoughts. I'm very new to all of this stuff and mainly spewing my own thoughts. Can anyone recommend any good options books that are in depth, yet practical for the day to day trading of options, or finding opportunities?

KO is a bad example because it is a very low volatility stock. I own Coke and have never written options against it and never will for this very reason and I am a serial covered option writer.

It all comes down to what you are trying to accomplish. Take something a bit more volatile for example. AAPL closed at 136.76 today and the Sept 140 calls closed at 4.16. If that gets called away in a couple of weeks you just made 5% in less than a month. If it doesn't you bought the stock 4 bucks cheaper than otherwise and you can sell some more against it next month.

Covered call writing is more of a trader than investor mindset. To each is own. Both strategies can work well if you know what you are doing and what you are trying to accomplish.

This is a pretty good summary for the purposes of this discussion.

Not all inputs into pricing models are fixed (i.e. future estimates of future underlying volitility, interest rates, ect). Options pricing is determined by the "supply and demand" of varying takes on these variables.

This absolutely happens, but rarely in very liquid stocks.


Basically, if you are writing a covered call you want stock to go up, but not through your short strike before expiration. If it does, then you would have been better off just owning the stock

Skindog is selling covered calls that are 30% out of the money for 1-2% per month. AAPL OCT $175 (about 30% out of the money) sell for $1.15, about 0.5% per month. Can you imagine how volatile the stocks he's writing against are? Or is Skindog doing a bit of exaggerationing?

Earning 5% in a month is great, but not at the expense of being called out of your stock when it shoots way higher. In August AAPL bounced between $111 and $139. Imagine the second week of August when your Apple stock was $120 you sold some covered calls at $125 for $4. Apple closed at $127 the last day of options. The next day it was trading for $130 and a week later $139. But you got called out of your shares for $124.

There is no free lunch with options. The chance that your stock will trade higher than the call price is worth something, about what you sell it for. Worse is that if you want to hold the stock long term every time it gets called your long term capital gains clock gets reset, making it more likely you'll pay higher tax rates. Plus you have to pay transaction costs in an expensive, illiquid options market that only trades in nickels.

Very well said.

How often does that happen, on average? Not very often, considering the average gain of the market is about 10% a year. In the AAPL example, he's beaten that in 3 months.

Duh! It's all about risk, reward, and expectation. If you aren't comfortable selling calls then don't. If you are comfortable with it and understand the risks (and rewards) you can enhance your profitability.

Like I said it's more trading than investing and some people think all trading is evil. I'm a trader and not an investor so when I see a good covered opportunity I take it. When writing calls my hope is generally that I DO get called away. The real risk is the stock tanking and getting stuck with it.

Hmmm? That figures out to a $9 gain in 2 weeks or about 7.5%. That's an annual return of about 180%. Nice trade!

DesertCat,

You make it sound like there is no place for covered calls, that a stock is either good or bad. If bad then don't buy the stock, if good then don't sell the covered call.

Ignoring taxes, what if you buy a company only because you think it is underpriced? You don't buy it because you think the business has any outstanding potential, but merely because you look at the company's assets and you think the stock price is low compared to that. You buy it only because it shouldn't go down. Then both your short at the strike price as well as your long-term holding is justified.

(I rarely write calls because most of my picks don't fall into this category. I also agree with your underlying premise that if you are selling a call you are selling a call, and the value of that call is separate from your stock purchase)

Someone owning the stock made double the gain and can still qualify for long term cap gains. Any long term holder who bought Apple at $10 and rode it all the way up to $140 would likely have cost themselves lots of profits by selling covered calls.

There is nothing wrong with being a trader, but it just seems naked options would be a better vehicle for trading than covered calls. For the long term investor you are losing upside a while lowering variance. If you need that, a better approach would be to add some bonds while keeping your equity holdings tax efficient.

Good luck with that

Not neccessarily, there are plenty of uses and strategies for longer terms but you are closed minded enough that I'm willing to drop this conversation completely.

I don't agree with Desert Cat about how he reads the "tea leaves" all the time but he's a smart guy. He's totally right IMO regarding the value in writing covered calls i.e. it's a poor idea. If you must do it I'd recommend shorting puts instead. Same risk profile, same EV, less transaction costs, and less capital tied up. Really though, I'd strongly recommend not doing it FWIW.

If you have something to add to the conversation, by all means go ahead. I'm not close minded so you don't have to take your (base)ball and just go home. Our conversation has been so far

Me: covered calls didn't work out so well in August for APPL holders.

You: They made $9!

Me: Buy and holders would have made more.

You: OMG how dare you point that out. I know so much more than you but instead of educating everyone I'm just going to stamp my feet and go away!

Sounds silly doesn't it? So lets start over, what have I missed? How do covered calls generate excess after tax returns over just buying and holding the stock for long term investors?

I'm gonna get back in on this

I don't think bringing up specific examples does anything to bring the discussion one way or another. I can find a mountainload of cases where writing a covered call resulted in more profit than either buying the stock by itself or writing a call by itself.

Personally, I do it for stocks that I am bullish on (I wouldn't want to hold stocks just for covered call writing) if I feel both that the option provides a good reward and that the stock's raw 'volatility' isn't a good representation of whether the stock will reach a certain level. It is definitely more of a trading thing than an investment thing.

Just because I'm bullish on the stocks I buy, I might be hesitant to write something like the AAPL 125 call. Yes, you get a lot of cash for your time value, but like you pointed out - it's for a reason. In my covered call writing I leave enough room such that if the stock spikes and does hit the strike price, I will be very happy with my stock returns for the month. In all cases, I use it as something of a bonus return for my investment rather than an end-all strategy.

Like I said, I have a feeling that properly used, under specific circumstances that certain stocks face, covered call writing might bring abnormal returns. I don't write covered calls for every stock I own.

I can tell you definitively that I've made more money using covered calls than if I had not used them.. but that obviously doesn't prove anything with my short investing timeframe.

I think the most useful way of proving any point would be for either side to bring some articles or sources to the table.

No. Option seller could have bought it back at 127 and been $2 ahead of the buy and holders.

If covered calls are so lucrative, why not sell the calls naked? All of the profits without tying up as much capital. If the stock closes over the call price you just buy at market and take a small loss. A small loss because stocks that pay big premiums never go up much, right?