Request for Feedback on Covered Call Strategy

I own 100 shares of INTC that I would like to use to write covered calls as an introduction to option trading.

Here is the strategy that I am considering. I would like some feedback on it.

Write an OTM call option that is 30 - 45 days from expiration.

Write a call option whose premium is at least 2% of the stock price. (INTC is currently $22.69, so at least $0.45)

Write a call option whose implied volatility is around 30%

After writing the covered call option, place a contingent order that says if the stock price reaches the strike price, buy back the option.

Wait and hope that the option expires worthless.

Repeat the process once the option expires or once the contingent order kicks in.

Steps 1 and 2 are straight out of the options playbook. Am i interpreting these correctly?

Step 3 is from the OptionGuy's Blog http://community.tradeking.com/members/optionsguy/blogs/2080-successful-covered-call-writing-more-on-tip-1 

Steps 4 through 6 are my own intuition.

According to the rules set in steps 1 - 3, I am looking at writing a June 08 call option with a strike price of 24.

Thanks.

 

Your on the right track.  A tip is to only sell calls on a day when your stock is up.  Call prices get slightly exaggerated (in your favor) when a stock runs higher.  Also, I would not use a contingent order to buy the call back automatically.  Intel may fluctuate up 3 or down 3 dollars a couple of times during your 30-45 day period.  The chances of being assigned before expiration day is virtually nill. It's best to hold on until expiration day then buy it back.  That way all the time premium is gone.

Good Luck 

 

Thanks for your suggestions RogerLee and Brian.

I have modified my strategy based on your recommendations.

Write an OTM call option 30 - 45 days before expiration on a day the underlying is up 3% in one day, 4% in two days, or 5% in three days.

Write a call option whose premium is between 2% and 2.5% of the stock price. (INTC is currently $23.58 so between $0.47 and $0.59)

If the call option is ITM on expiration day, use the spread order screen to buy back the call option and sell a new option to cover the cost of the buy back (up to 3% of the current stock price)

If the call option is OTM on expiration day, allow it to expire worthless and repeat the process.

Any additional feedback? Do I need to have a stop loss on the call option in case the stock shoots through the roof?

Two days ago INTC gained 4% in one day and I sold a June 24 Call option 51 days before expiration for $0.50. I am feeling a little regret for breaking my rule #1, but I felt the need to take advantage of a Intel's jump in price. See my trade notes for more on this.

I'll keep y'all updated with how this play goes. Yesterday the June 24 Call option's last trade was $0.68.

Just a quick update:

INTC has been rising steadily for the past week, or so. Today, INTC rose above the stike price of the June 24 Call option that I wrote a week or so ago. My first reaction to seeing this was to roll my position up to a June 25 Call. When I looked into it further I could roll this option for a $0.47 debit (Buy to Close June 24 Call for $0.87; Sell to Open June 25 Call for $0.40)

Perhaps this would be a good move, but I do not fully understand the implications of it. I sold my original June 24 Call option for $0.50. Any thoughts from the community on whether or not rolling my position now would be a good idea?

For now, I am going to stick it out and see what happens. The rules I set for myself on this play say I am going to wait it out until expiration (see my previous post). And as RogeLee says, "Intel may fluctuate up 3 or down 3 dollars a couple of times during your 30-45 day period."

(just the 1 call going, Potaire) 

My INTC June 24 call option expired worthless. RogerLee's advice (see above) proved to be good advice this month as INTC rose as high as $25 in the middle of May (see my post from May 14 above), but then fell back below my option contract's $24 strike price.

Because of how the option calendar works this month, I would have to break my rule #1 to open a covered call position for July. The June contract expired with less than 30 days till July's expiration. My option trading level is such that I can only sell July options once the June option expired or was bought back.

I would allow an exception to this rule and start shopping for a INTC July option today; however, I will sit this month out since I will be traveling without internet access for all of July.

Take care, happy investing.

One other thing while you are holding the stock waiting for it to move up you will have a delta of 1, obviously you have the full risk of owning the stock.  You will reduce this risk to about .6  when you sell the near the money call.  This has the effect of reducing your risk of ownership to about 60 shares.

Hi All! Interesting discussion on covered calls. I am new here and still learning the ropes, just wanted to mention that Covered Calls (long shares + short calls) = Naked (short) Puts. It really depends what you are trying to achieve however from risk perspective they are the same and the naked puts are one transaction (one fee) where the covered calls involve two comissions - purchase the shares and sell the calls. And because of the "smile" the puts usually carry higher premium (higher IV) than the calls

 

Hello Architortured,

 I understand your point. Being new here, it is beyond me why TK requires Level 4 and $25K account to sell naked puts. There was an earlier discussion here that it is clearing firm requirement. it is their decision and we need to follow the rules. Be as it may be I am a BIG CHICKEN and covered calls and naked puts are too scary for me. Usually if I think a stock will go up, I would sell a put vertical - short higher OTM put and long lower put. Sure, the credit is less but the risk and margin required are much less (no Level IV) and the return on margin is very respectable. Some times the lower put can be even in a further away month

Regarding the "smile" - in general OTM puts trade with higher IV than the OTM calls after the 1987 market crash. If one draws a graph of implied volatility (vertical) at different strike prices (horizontal) the graph looks like a smile or maybe a smirk (they say).  It is a long discussion why the smile (why the options trade with different IV) is present but to a degree it makes sense. The market is more afraid of crashing down vs crashing up (if there is such a thing) and bids up put prices

"OldFart", TK is following federal regulations.  The requirements for each level are federally mandated, so it's not just TK. I personally think the rules are kind of strange.  I think it's more appropriate for some people to have level 3 than level 1. I applied as a level 2 and got it, but now that I've read some more books, and have really developed a style I am confortable with, I realize that I usually sell at or before a target price.  I know that bull call spreads are much more appropriate, and not only will provide better returns, but provide a limited form of protection against my call.  If I lose my premium on my lower strike price call, I can collect the premium on the higher price getting a "rebate" or insuring my losses up to X. Also, the breakeven point is a lower price, and I'm also protected against theta(time) decay or paying too much on a stock with high IV.  What's more, it will give me more conviction and confidence as it will help prevent me from selling too early as I would with just a call, due to my worries about theta(time) decay.

In my situation, A level 3 is much better.  I'll probably apply for a level 3, but I'm not sure whether or not I would qualify based on federal qualifications, even though I completely accept all risks.

I know that the regulations are probably in place to protect people who don't know what they're doing from losing a lot and suing, but personally I think that IF you don't meet the qualifications, you should still be given the chance to take some test to prove your knowledge is adequte. Not to mention, the applications are really no different then half the California bank loan application pre bubble crash, "stated net worth" and income, etc...newsflash, people out there do lie.   I don't intend on doing so, but the real unfair thing is that this so called "fair" rule, punishes the honest who are well informed, and perhaps also punishes the uninformed and unprepared investor anyways, particularly those that lie about their net worth.  Not to mention so called net worth can easily be manipulated.  I could probably get a loan and buy a house rather than live with my parents and my net worth would go up. However, the income that I get to keep in my pocket at the end of the month goes down, and although I have more available credit, I'm in a worse position financially, particularly if I overpaid for the house.  I could buy a deprecciating asset like an expensive new car on credit and my net worth goes up, but the real value goes down.  In my opinion, that means nothing as to whether or not it's financially appropriate for me to be a level 2 3 4 or 5.

But I digress. Does anyone know if there's anywhere that says the general requirements are for each level of option account? I'd really rather not spend the time to send in more information requesting a level 3 option account if I'm not going to qualify, and if I don't, I want to know how much more "networth/time investing/etc" I need before I try again.