This is a follow on to The Daily Options Report's coverage of this week's Striking Price column in Barron's.
The article was more about naked call writing but I will tweak my comments toward covered call selling as that strategy is probably more applicable to readers of this page.
We may start to see more articles coming that highlight the virtues of selling covered calls. They reduce volatility and protect on the downside these articles are likely to say. I suppose this could be true but the magnitude of the protection offered is quite low. If your favorite stock is down 12% from its high, which is not an unreasonable move over the last six weeks, how much solace would you take from bringing in 1.5%-2% on a covered call?
Selling calls does have utility and can add value but it is important to have realistic expectations about what calls can do for you. If you sell calls against your entire portfolio today and bring in 2% of your portfolio's value for three months and then the market drops 20% four weeks later it is likely that you will not even, emotionally speaking, derive any benefit from the calls sold.
I don't do much in the way of call selling. There is one mind set toward call selling that I favor and that I have written about before which is to enhance dividends.
For an investor who is typically a 500 share buyer, that person could sell one or two call options every couple of months. Over the course of the year this could add another 100 basis points of yield to the portfolio over the course of the year. This offers no downside protection to speak of and if your stocks go up a lot you are not cutting off your upside in a damaging way.
If your portfolio yields 2.5%, a move up to 3.5% will be significant a good percentage of the time, but not all the time.
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4 comments:
Sell 20% out of the money, 60 day calls and you will RARELY get the stock called away and add 200-300 basis points to your portfolio return annually.
Most investors have no clue about covered call writing. Unfortunately, I think Roger falls in that camp.
20% out of the money for 60 days? There is no premium net of commissions.
Here are examples with widely held stocks.
XOM at $57/share. An Aug 70 call has literally no bid.
A smaller fiancial say US Bancorp (USB) at $31. The Aug 37.50 call, again no bid.
Illinois Tool Work (ITW) at $47. There is no $57.50 for aug but a $55 is bid at $0.05 and the $60 has not bid.
Maybe you are talking about tech but how much of your portfolio is in tech?
In health if you own PFE at $23, the Aug 27.50 have no bid.
I don't see how the strategy spelled out in the comment can work unless the portfolio is very volatile.
PS I did not cherry pick the names, I randomly picked names that I think are widely held but that I do not own.
sell the RMBS Aug 30's for .80. And that is over 30% out of the money for an immediate 3.5% dividend.
uh huh, to the question in my reply, what percentage of your portfolio is tech and as volatile as RMBS?
No sure how long you have owned it (or if you even own it but it has cut in half, literally, during this sell off which ties into the point I made in the post, how much solace is 3.5% for the person who bought at $46 and did not sell?
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