Minyan Mailbag: When Covered Calls Aren't Profitable-Minyanville

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Minyan Mailbag: When Covered Calls Aren't Profitable

Mark Wolfinger Mar 27, 2009 9:30 am

Minyan Mailbag: When Covered Calls Aren't Profitable


		Seven tips to help you know when to cover.

Dear Professor Wolfinger,

I have a position in the ETF, Ultra Russell 2000 (UWM), and want to take a portion (about one-third), and place a specific type of covered call on it.

I also want to take that one-third position and put hallf of that in each of 2 similiar covered calls, but where one has less of a chance of being assigned. I'm thinking of placing these halves into the deepest item strikes available - right now, the April 3 and July 3 (May only has a May 5 listed right now).

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Would my other half, in the July 3, be less susceptible to being assigned in the next month or so? Or is it impossible to say? Basically, I'd just be giving myself the "chance" of having more time not being assigned, in case the stock drops far, and I can buy back the call for a profit.

So i guess that's 2 questions: What are the chances of assignment between different strike dates of the same strike amount, and what is the usefulness of getting a large call premium and using it to increase my stock holdings of a stock I think will do well for the next 2-3 months?

Minyan Adan

Dear Minyan Adan,

I assume you understand that covered calls can only be written on 100 shares of UWM (or any other stock or ETF). Thus, to accomplish what you want to do, you require 600 shares, minimum - because you want to use half of one-third of your position, and that must be at least 100 shares.

You can place the first one-third portion - that's 200 shares - into the covered call of your choice. That means selling 2 call options.

You want to split the second one-third portion into 2 different covered calls. That means you would sell 1-lots of 2 different calls. You want to sell one April 3 call and one July 3 call (By the way, you can forget about May 3 calls. they will NOT be listed for trading, unless UWM dips below 4.) Don't do it. It's a bad idea.

But don't feel bad: There are certain things about covered-call writing that you may not know, and I'd be happy to explain them to you.

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Comments (9)

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Adan Lerma

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03-30-2009, 7:09 am
greg, thanks, yes, i keep hearing about mcmillan's book too (along w/mark's rookies bk) - i'll have to check it out too... and totally agree re the minyanville profs, adam, jim, mark, steve, Read More

Adan Lerma

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03-30-2009, 7:21 am
wanted to do a mini followup on what i've learned so far from my initial deep in the money covered call option sale that turned out to be like a firecracker with too short a fuse; luckily i didn't get too burned ;-) my acct Read More

Adan Lerma

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04-06-2009, 6:32 am
hi mark i'm still struggling to express what i'm doing ;-) but what i meant was, yes, i sold at the strike price, but that price, $3, plus my total premium, was greater than what the stock was selling for on assignment; so i Read More

Mark Wolfinger

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04-06-2009, 10:01 am
Adan, 1) When you arae assigned an exercise notice, it does not matter at what price the stock is trading. When you sell shares, you sell AT THE STRIKE PRICE - not a higher price. Thus, you did not get a higher price for your shares wh Read More

Mark Wolfinger

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04-06-2009, 10:11 am
"Writing calls is neutral to bearish sentiment before it's bullish. Buying the calls or a spread would have been a bullish play." I disagree. This is a situation in which people see the world differently. Heres' Read More


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