Looking to divesify my investment portfolio.
Does anyone write covered calls?
How do you use them?
Success ratio?
Annual rate of return?
What else do I need know about them?

There are some web tutorials, as you’d expect. I’ve seen guys delve into them, if one has a higher level of interest.


https://www.investopedia.com/a.../08/covered-call.asp

Those that I know did it similar to a hobby, kept up with the market most of the time. One guy does fishing, another is into motorcycling, these guys had investing as a hobby. Like anything, the more you do, the more you learn.

I’d just start at the ‘fun money’ level.

You can't lose money, but it can really limit future profits of stocks.

I did it for a while years ago.

As my broker said all good stocks will get called away eventually, he was correct.

I think it works well in times of low volatility.

In times like this you are trading for small quick profits vs long term growth.

Just my opinion, it is work what you paid for it.

I am neither a lawyer or financial advisor.

I am content with choosing stocks. I considered writing calls in the past, but in a market such as we have right now it would be a bad move. Too much volatility.

I could write a ton of pages on selling covered calls, but before you even start, you should have a solid understanding of option basics like volatility and delta. It's not simply a matter of picking a strike a few bucks over your purchase price and hoping for the best. Knowing how to enter the trade and how to manage the trade will make the difference in your success.

It is certainly not the case that selling covered calls is ideal in a low volatility environment. Any option selling strategy will always perform better in a high volatility environment because option prices rise when volatility goes up (you can sell the option for more or pick a further-out strike for the same money). Being in a high volatility environment doesn't mean that you're more likely to be called out - this is where an understanding of things like delta come into play.

Lots of good info here to get you started: link

^^^^^^^^^^^^
See how much I know. This guy knows his stuff.

quote:

Originally posted by msfzoe:
Looking to divesify my investment portfolio.
Does anyone write covered calls?
How do you use them?
Success ratio?
Annual rate of return?
What else do I need know about them?

Covered calls work better in stagnant markets with low volatility.

Covered calls allow you to sells a derivative on block of stocks, typically these blocks are each written for 100 shares. When you sell an option, you collect a premium, and agree to sell your stock at a predetermined price through the expiration date. The expiration date can be as along as 180 days (I think).

The closer the strike price of the option to the current price, the more the premium.

Real Example:

Amazon (AMZN)
I can buy a call for $12.30 per 100 Shares to buy a strike price at $2650.00 that expires in 5 days. Given the current stock price is $2545. Given it traded at $2696 on the 10th of June, there is a possibility the trade could be in the money. IF I were to buy it, I would not execute the call unless the price as of the expiration date was north of $2650. You will loose money below $2662.30, you will make money it is above that. You can also sell the option if the price is north of where it is now, and may make of loose money, depending on the current price.

By selling a call, your upside is the premium. If you sell a $13 strike price for a stock currently priced at $11, you may get 50 cents per contract. If the stock goes to $15, it will be executed , and you are forced to sell your stock at $13/ share * # of contracts. Writing calls for shares you own means the call is covered. Writing calls for shares you do not own is stupid, and called a naked call. Be prepared to have large amounts of liquid cash with your brokerage if you plan to play that game.

30% of all calls expire worthless. 10% are in the money, and 60% are offset (you wrote a call option for $40, and later you bought a call option for $40).

There is no way to calculate an annual rate of return because it is based on your portfolio, willing buyers and sellers, and future value of the asset. IT is a derivative, meaning the value of the option is derived from the underlying value of the asset. If you sold options back in March, the earnings from those options would have been dwarfed by the potential earnings from the actual stock.

There is a bunch to learn, but please start by reading the link Chicago sig man offered.

You may want to start off by contacting your brokerage house to see if your account is eligible for options.

Just to be clear and supplement the above comments, selling an option does not diversify one’s portfolio. You are simply selling insurance for a cash premium. What you may then do with that cash is a separate, unrelated decision. The mere act of selling an option incurs a liability, as opposed to buying an asset.

If you want to underwrite an insurance policy, I suggest focusing instead on a risk that relates to and can be managed via your chosen occupation / expertise. Granted, a covered call limits your exposure, but I wouldn’t play that game unless you’re quite fluent in option valuations - especially the overall time value component - and you’re competent in selecting stocks.

For the most part, selling an option only makes sense when you’re either trying to partially offset the cost of a purchased option (at the expense of partially neutering the purchased option’s upside) or wanting to capitalize on some unusual fluctuation in the time value as it moves to zero.

Also, by having to hold a long position for the “cover”, you forfeit one of the benefits of a derivative (ie the ability to capitalize on fluctuations in the underlying’s value without having to purchase the underlying).

I consider them essential for some jobs

quote:

Covered calls work better in stagnant markets with low volatility.

No no no.....Just no. I see this advice given frequently and it makes me cringe every time. Before trading options, it is essential to have a full understanding of volatility (among other things). You cannot succeed long-term without it.