Exactly 11 seconds before the close on Friday, I had what alcoholics refer to as a moment of clarity. It was when I decided to stop playing with covered calls.
Some people spent that afternoon in the Hamptons. I spent it hoping that Raymond James Financial (RJF) would finish below $22.50.
See, a couple weeks back I decided to sell out-of-the-money calls against some of my stock positions. The market was feeling kind of frothy, and this was an easy way to get paid while the market pulled back.
Simple, right?
My simplistic and narcissistic thinking angered the trading gods, who immediately decided to extend the rally just long enough to piss me off. The stocks I sold calls against no longer looked like they were topping - they were heading to the moon! Perfect World (PWRD) wasn't stopping at $40. It was headed to $50! NOW!
The only solution was to buy all the calls I sold back, because I was suddenly not cool with the idea of forced into selling any of my long stock positions. One by one, I covered my short call positions, the final one being those pesky RJF August $22.50's at exactly 3:59:49 PM.
When I woke up this morning, I looked at my account statements from the past year or so.
I bought Central European Distribution Corp. (CEDC) at $8.45 and sold at $10 in a covered call position. That stock is now at $33. I shorted Research In Motion (RIMM) puts (short puts are roughly equivalent to covered calls) when the stock was in the $40's. That stock is now at $77 and change.
The trading gods punished me for not having enough conviction in my best trading ideas. Like many people, I get angry when I lose money. But I get really angry when I think about how much money I could’ve/would’ve/should’ve made if I had bought this or that - kind of like when my Mom gushes about $35,000 Park Slope brownstones.
So I'm done playing with covered calls. I'm trying to make money and giving away the upside for a few bucks just isn't helping.
4 comments:
I recently had a similar moment of clarity. Decided from now on instead of writing covered calls to simply buy puts for protection.
Not exactly the same, I know, won't generate extra cash, quite the opposite but this way I can have peace of mind and let the winners run.
covered calls can be good on relaly volatile stocks though because the premiums can be so big.
The opposite of selling covered call is to buy long-term DITM calls.
It requires less cash outlay vis-a-vis outright share purchase.
And you are paying far less time value than OTM calls. Less time value = less decay
I utilize covered calls myself. My strategy is that I don't really watch the market per se, but I analyze whether the actual option premium I would earn is worth it. If option premiums are not high enough for my liking, I will just not sell them. In general, my minimum is that selling an option with a strike that is 10% above a long position, I want to be able to earn 10% in yearly option commissions. The premiums of course depend on the underlying volatility but you might be surprised at how quickly the premiums can move for very little underlying price movement.
Anyway, that's (some of) what I do and I've had an excellent year using it.
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