Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Minyan Mailbag - Covered Calls



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Hello Professor Succo, I hope all is well.

I have reread
your primer on covered call writing that you published awhile back, it is truly a wonderful resource. I have a quick question regarding proper strategy for covered call writing.

You discussed the mistake of "rolling down", and to not overtrade volatility should the price of the underlying drop by covering the short call of the higher strike and writing a new call at a lower strike. Agreed.

My question is: Does this 'rule' apply when a stock is purchased and a call is written immediately and let's say after 6 months the stock has declined and the option expires worthless, should I refrain from writing until the stock appreciates or is it prudent to write a medium correlation call at the current price (a .5 delta call will have a lower strike than my equity purchase price) and manage it by not letting it get too far in-the-money (.8 delta) if the stock appreciates?

I've got two voices in my head voicing their opinion on this strategy and I want to make sure the greedy voice doesn't get the upper hand.

Thanks Much,
Minyan George from Malta


There are two voices because there is no hard answer. My rules are more like guidelines: they are there to make you think more than anything else. They will help you avoid big mistakes.

The criteria in all of this, whether you are over-writing an existing position or entering into a buy-write, is that you have to feel comfortable owning the stock; in other words, comfortable owning it outright at a price less the option price. If yes, don't roll down. If no, you probably should be out of the whole trade.

Being short calls against long stock is only a quasi-hedge.

Prof. Succo

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos