Secret 51COVERED CALL WRITING STRATEGIES
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One covered call writing strategy that can generate much
better returns is to write calls on low priced stocks, priced under
$15 a share. Here you can sometimes find an overpriced call
whose premium is a much higher percentage of the stock. Premiums
on calls on lower priced stocks are much higher than premiums
on high priced stocks.
However, don’t buy a low priced stock just to write a high
priced call against it. Make sure it is a stock that you want to
own, or else you will own a bunch of dogs in your portfolio and
your option premiums will not offset your losses from those
stocks.
Sometimes you can create some really attractive risk-reward plays by doing such covered writing. For example, in 2001, I
bought 100 shares of Rambus at 16 and sold a Jan 2003, 25 call at
8. The premium paid for 50% of the stock (16 – 8 = 8), so my
total cost and risk on the position was only 8. At the same time, I
did not limit much of my upside profit. My potential profit is 25
less the cost of the stock at 8 or 17 points, which is over a 200%
return.
One covered call writing strategy that can generate much
better returns is to write calls on low priced stocks, priced under
$15 a share. Here you can sometimes find an overpriced call
whose premium is a much higher percentage of the stock. Premiums
on calls on lower priced stocks are much higher than premiums
on high priced stocks.
However, don’t buy a low priced stock just to write a high
priced call against it. Make sure it is a stock that you want to
own, or else you will own a bunch of dogs in your portfolio and
your option premiums will not offset your losses from those
stocks.
Sometimes you can create some really attractive risk-reward plays by doing such covered writing. For example, in 2001, I
bought 100 shares of Rambus at 16 and sold a Jan 2003, 25 call at
8. The premium paid for 50% of the stock (16 – 8 = 8), so my
total cost and risk on the position was only 8. At the same time, I
did not limit much of my upside profit. My potential profit is 25
less the cost of the stock at 8 or 17 points, which is over a 200%
return.