Maksims Covered Call Options Forum

[farooq]

UYG just write calls against 8.
Leaps on UYG not worth buying buy stock then.
long UYG March 6 and sell March 8 is attractive.
Ford is in hot water if WH is not ready to give money. But then market will tank 2000 to 3000 points on DJIA and we can drop 350 points on S&P.

If WH is giving money then I will write calls with 5 $ price difference. Long 5 short 10.

URE is good candidate here.

Farooq

Technical Analysis (TA) shows UYG can move higher once uncertainty is removed.

[farooq]

If you want to write options then no one beats IB (interactive Brokers).
If you need hand holding then they are not for you.
Great execution and great price. You can trade one contract for $ 1 that is there minimum no ticket charge other wise for 2 it is less and can Buy 200 shares for 1 $ and that is minimum charge.

If you change price again and again for options then they are not for you because every time you change an order on option you will be charged 1 $.
Remember execution is the most important part in trading options or stocks.

Good luck.

Farooq

[maksim]

You did a covered call on UYG? Expiring worthless or what?

For options, I trade at the brokerage where I am an advisor...

though, I love OptionsHouse. Low minimums to have accounts, and most importantly, easy interface, great tools to look for straddles, covered calls, etc. Trade prices are very low as well. reply with your email, will send you a link, sign up, try it out. They refund you any transfer fees.

[ksbirddog]

My UYG covered call will expire tomorrow with a nice profit for me.
Maksim, I appreciate your willingness to share your knowledge with people like me who are "rookies" when it comes to options.
Currently, I use E-Trade as my brokerage; however, I am giving some thought to switching to optionsxpress. From your experience, what brokerages are the better ones to use for options.
TIA

[maksim]

Ideas and thoughts before expiration

So have Ford and UYG covered that are going to expire worthless this month. I have already bought back my UYG's for $.05, for a nice $.30 profit for all calls in 10 days or so.

Ford Dec $3 calls are on the edge with Ford now just dropping to slightly below $3.

So here are the ideas I am pondering, lets take them one at a time.

UYG was a covered call, against a Jun 09 $7 strike with a cost basis of $2.54, I have in 2 months collected $1.05 in premiums, and the Jun 09 is now trading at about $2. I can continue to write the Jan 09 $7 for $.55.... though my dream came true.

UYG now has 2010 and 2011 LEAPS. So what I am thinking of doing is selling my Jun 09 $7 for $2 or so... and buy into Jan 2010 $5 for about $3, or even better, get an extra year... for Jan 2011 $4 for $4.20, or $5 for $3.80.

The bid ask for Jan 2011 is just soooo expensive that it pays to spend a bit more to get protection. What are your thoughts?

For Ford... the next months, Jan 09 is lowest strike of $2.50 as opposed to Dec that were $3, so only 20 to 30 cents of time premium for a month. I have this covered call/calendar spread covered by a Jan 2010 $2.50, cost basis $1.12, trading now for $1.40 or so. I think I will just close this one out for a gain of $.41 on the Dec 08 $3 calls I wrote (pending it expires worthless), and a gain of $.38 on the Jan 2010 $2.50 call, all together $.79 gain, on $1.12 initial investment for 19 days.

What I am really looking into for next month may be MTL covered call, or GE.

[maksim]

There are a few closed end funds I like, trading at discounts near 25% to NAV that do just that. Best part... 20% yields that are safe.

[maksim]

No.

Personaly, I would stay away from them. The reason why is you want you learn, or know why the "black box" systems are telling you to buy or sell.

Its like driving on cruise control, or relying on stability control, ABS, Dynamic Vehicle Control, Brake force distribution, radar cruise control. or wait...


BEST EXAMPLE.... the Lexus that parks itself.... its a nice tool, but it would be still wise to know how to parallel park your $100,000 lexus.

[ksbirddog]

Do any of you use a trading program like E-signal or Vector Vest?

[maksim]

When you sell covered calls, you are taking advantage that vast majority of calls expire worthless.

Also, keep in mind, if you are selling a call, someone is buying that very same call. Same vice versa, so lets use your example...

You wrote a call, say for Dec, and think it may be expiring in the money, so you buy it back to cover, and immediately write another for Jan. So when you buy your Dec call, someone is selling their call to you.

That article basicly talks about regular Calls... and due to the fact that they are mostly time premium, expire worthless.

[farooq]

Here is about option expiring worth less, 90 % options puts and calls written out of money to two strike price.
Let say 30 $ stock so options written at 40 3 months ago usually expire worth less.
Funds manager writes them to supplement income.
They sell share some time so strike expire just below the money.
You will see this phenomena in index options often.
Most options are bought as hedge, usually puts expire more worth less.
Here is an example, I want to short QQQQ but I do not want unlimited exposure so as a fund manager I can buy JAN 32 calls and start shorting against it.
Now I am hedged my losses will not exceed more then 32 so in next 25 trading days I make 40 Cents a day I made 10 $ so now if stock is at or above 32 I make more. If it expire worth less I am still ahead.
Second benefit is I am charged less margin or portfolio margin so I can play the game with more shares.
So you need to write calls for price where you want to sell it, if other party making money let him. It is Ok if both parties are making money.

[birdguy]

While I don't disagree with the results in the article there is something that is ignored in articles like these.

When I have sold a covered call that could be called at expiration I tend to cover it and move to a future month. I will do this if the move meets my profitability standards and if I believe that the new option has a good chance of expiring worthless. Doing this takes the call out of the catagory of expiring in the money. Thus the statistics could be out of whack by a unknown amount as I presume that others do this also.

How large a percentage is this? I don't have the faintest idea but could it be substantial?

Birdguy

[inflationista]

what i like about covered calls is that if i buy stocks i WANT - i get paid to hold them over time -

if i make a good buy and the stock goes up a little, i then write the call to guarantee a certain amount of profit, but if it doesn't get called, no biggie, i write against them again -

i guess what i was wondering was with OTM/ITM does that have to do with strike + premium?

[maksim]

Just seeing if sig works.

[maksim]

Awesome article. I wondering if there was a follow up study done.

Now the easy thing to say is.. well, you buy options, then sell before expiration... yet... someone does buy the options. End of the day, most expire worthless.

To such extent, this is why over time, writing calls, and doing covered calls, calendar spreads gives you a higher return over S&P, with a lower standard deviation, or Risk.

For buying calls, close them out. =) Follow a system, and dont dump all your money into plain ol Calls. Or if you will, make sure they are at least IN THE MONEY, or LEAPS.

They are lottery tickets... and last I checked, the states doing the lotteries are not going out of business.

Heck... Just ask anyone who is hanging on to SKF out of the money calls.

this is not to say dont speculate, but it is to say, dont have speculation BE your investment plan.

Depending on age, risk tolerance, goals, speculative stuff can be up to 25% of portfolio.

[inflationista]

the trend is our friend:

http://www.investopedia.com/articles/optioninvestor/03/100103.asp?viewed=1

[maksim]

FED Goes NUCLEAR - Economic commentary from First Trust

The Fed Goes Nuclear To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/16/2008


Today the Federal Reserve declared all out war on the recent, but severe, drop in the velocity of money that has driven the US into recession and, at the same time, generated the fastest declines in monthly consumer prices since the 1930s. The declaration of war includes three major lines of attack.

First, the Fed reduced the target federal funds rate (previously 1%) to a range between 0% and 0.25%, essentially adopting a Japanese-style zero interest rate policy.

Second, it committed to maintaining this unprecedented low interest-rate range, saying that weak economic conditions “warrant exceptionally low levels of the federal funds rate for some time.”

Third, it said it will continue to use its already expanded balance sheet to support credit markets, what some call “quantitative easing.” In addition to signaling that it will hold interest rates down, the Fed said it will buy agency debt and mortgage-backed securities, along with longer-term Treasury securities. All of this is reminiscent of the early 2000s when the Fed said it would hold short-term rates down for a “considerable period,” which was a strategy to pull long-term rates down.

The Fed’s statement was very bearish on the economy and signaled that the Fed expects inflation to go below a level consistent with price stability.

While all of this may appear appropriate in the heat of battle, this idea that the Fed should attempt to drive down long-term interest rates to stimulate the economy is flawed. The last time the Fed did this was in the early 2000s when it drove short-term interest rates down to 1%, and convinced markets that these rates would stay low for a long time. This in turn brought down long-term interest rates, which is what the Fed wanted.

Those low interest rates, as everyone knows, were a key catalyst beneath an over-bought and over-leveraged housing market. They also drove the value of the dollar down, while igniting inflationary pressures and pushing oil prices near $150/barrel, which virtually killed the auto industry. Apparently, this is all behind us now and the Fed is using the same strategy all over again.

This strategy of driving interest rates down below 25 basis points is likely to push money market fund yields to very near zero. As a result, we expect to see a huge shift toward holding cash in certificates of deposit. If banks pay depositors 25 or 50 basis points for money, they can earn a large spread on any borrowing. As a result, financial stocks soared today, giving a boost to the entire market.

The market obviously liked the Fed’s move, but it needs to realize that the Fed is throwing high-octane fuel on the fire. There will be a price to pay in the long run. For some reason, people only think about the cost of borrowing when the Fed cuts rates. But there is also a cost to lending, and the lower the Fed drives interest rates, the less incentive there is to lend.

This is especially true when mark-to-market accounting can undermine the value of assets. When risks rise, lenders want to earn higher rates not lower rates. Money does not grow on trees. It is printed by the Fed, added to the banking system and then used to make investments.
If rates are held artificially low while risks remain high, the financial system will not utilize money efficiently. Will anyone, other than the government, lend money to General Motors today at 75 basis points less than yesterday? The answer is no.

So, while we expect the Fed’s actions to help offset the decline in velocity in the near-term, it is the longer-term that is becoming more of a risk. Once the economy shows clear signs of reviving, the Fed must act quickly to remove this monetary stimulus.

Text of the Federal Reserve's Statement:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgmortgagebacked
securities as conditions warrant. The Committee
is also evaluating the potential benefits of purchasing
longer-term Treasury securities. Early next year, the
Federal Reserve will also implement the Term Asset-
Backed Securities Loan Facility to facilitate the extension
of credit to households and small businesses. The
Federal Reserve will continue to consider ways of using
its balance sheet to further support credit markets and
economic activity.
Voting for the FOMC monetary policy action were: Ben
S. Bernanke, Chairman; Christine M. Cumming;
Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn;
Randall S. Kroszner; Sandra Pianalto; Charles I.
Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously
approved a 75-basis-point decrease in the discount rate
to 1/2 percent. In taking this action, the Board approved
the requests submitted by the Boards of Directors of the
Federal Reserve Banks of New York, Cleveland,
Richmond, Atlanta, Minneapolis, and San Francisco.
The Board also established interest rates on required and
excess reserve balances of 1/4 percent.
Brian S. Wesbury, Chief Economist
Robert Stein, Senior Economist

[maksim]

FAS Covered Call

Inspired by another poster on a different forum.

FAS @ 26.09
Jan 09 $30 @ $4.80

BE = $21.29 or 18% Downside Protection
22% return if static, 265% annualized.
40.9% return if called, 481% annualized.

[inflationista]

that'd be great, thanks -

[maksim]

If they are Jan's, not that likely that they will get called until last week of Jan expiration.

One follow up may be that when it gets closer to $5, to buy back the $2.50's and roll up if you want more room on the upside, will evaluate it later if you would like.

[inflationista]

they're january calls -

i actually don't mind that they're up, i wanted to insure my profit - which i did - i just feel more strongly now that it's got legs to run -

my hope is that the calls continue to get traded so it doesn't make sense for the buyer to call them away and i get to keep the insurance money -

no matter -

i used some of the money to buy HL earlier -

bullish moves are much more fun than bear moves, IMO -

happy trading -

[maksim]

Yes, that is true, most dont get exercised.

Are those Dec calls or Jan you wrote? If Jan, dont have to worry much.

If Dec. perhaps.

You would get a notice and cash in your account if called away.

Getting called away is actually not the worst thing that can happen! It means you made money!

But I was thinking of you when GNW popped today.

[inflationista]

well don't i feel like a prize idiot - :)

how will i know if those people who i sold calls to are ready to convert the calls into shares?

will i just wake up one day and i'll have cash where my shares were?

is it true that a high percentage of options are never called on?

[inflationista]

i wrote jan 250's - have had the shares since around 138, so basically just insuring the profit while the premiums are up -

[maksim]

Wrote calls or Sold the calls you had?

Could be good move, on alot of these $2.50 or so stocks, the premiums are just fat.

[inflationista]

sold 2.5 jan calls on all of my GNW shares today - keeping the rest of my cash on hand for a quick hitch - when is option expiry, anyway?

[maksim]

And they say Ford doesnt build cars people want... In the United States. =P

http://www.ford.co.uk/Cars/Mondeo
http://www.ford.co.uk/Cars/NewFocus
http://www.ford.co.uk/Cars/NewFiesta



PRESS RELEASE: Ford's New Fiesta Global Small Car Off to a Fast Start in Europe; Coming To China...
Symbols: F I/AUT I/XDJGI I/XFFX I/XNYA I/XRUS I/XSP1X I/XSP5X N/DJIN N/DJN N/DJWB N/CNW N/DJPN N/DJWI N/HIY N/MSH N/PDT N/PRL N/TPCT M/NCY M/NND M/TPX P/CMR P/DJCB P/EWR P/TAP R/MI R/NME R/US R/USC
-- New global Fiesta is off to a strong start in Europe in its first two months

on sale, helping Ford's European operations gain market share despite weaker
overall demand. -- The new Fiesta was Ford's second best-selling vehicle in

Europe behind the Focus in November and is attracting a broader range of customers. About half of new Fiesta buyers are choosing the upscale Titanium
and Ghia trim levels. -- The Fiesta, including the new version and outgoing

model, was the top-selling vehicle in the United Kingdom in November among all automakers, capturing 6.2 percent of the total new car market, the Fiesta's
highest market share in the U.K. since 1998. -- The new Fiesta, the first of a

new breed of exciting and refined global small cars coming to market from Ford, is currently on sale in Europe and South Africa. It will go on sale in China, Australia and New Zealand in early 2009 and other major Asian Pacific markets in early 2010. The new Fiesta goes on sale in the United States in early 2010.

COLOGNE, Germany, Dec. 15 /PRNewswire-FirstCall/ -- The new Ford Fiesta - the

stylish subcompact that is ushering in a new wave of global cars from Ford - is off to a fast start in Europe.

The strong early sales of the Fiesta helped Ford's European operations increase market share in November and bodes well for the company as it prepares to launch the global small car in China in the first quarter of next year and in other key Asian markets and the United States in early 2010.

In its first two months on sale, Ford has sold more than 42,200 new Fiestas in Europe's main 19 markets despite soft overall industry sales, making the new Fiesta the second-most popular vehicle in the Ford of Europe lineup behind the Focus compact. The Fiesta, including the new version and outgoing model, was the best-selling car in the United Kingdom in November among all models from all automakers.

"After only two months since its introduction, the Fiesta is already our second best-selling model behind the Focus," said Ingvar Sviggum, vice president, marketing, sales and service, Ford of Europe. "In the U.K., the Fiesta's market share for November was the highest since January 1998 for the nameplate, and the new Fiesta attracted 1,000 more retail British buyers than the previous model in November 2007. This is a promising start for our all-new global model."

Overall, November Ford of Europe sold 95,700 vehicles across its 19 European markets. This was down 21.4 percent versus November 2007, but the company again outperformed the industry by increasing its market share to 8.8 percent, up 0.5 percentage points. The Ford brand is now firmly established as the No.
2 brand in Europe's main 19 markets behind only Volkswagen.

The new Fiesta is attracting a broader range of customers to the Ford brand and customers are choosing upscale features and trim packages, Sviggum said. About 50 percent of new buyers are choosing the upscale Titanium and Ghia versions of the new Fiesta. And half of new Fiestas on the road are equipped with Bluetooth capability, while more than 60 percent were ordered with leather-wrapped steering wheels and 30 percent with privacy glass.

Designed and developed in Europe for sale across Ford's global markets, the new Fiesta is the first in a series of fuel efficient new small cars developed through Ford's global product development process. Its stylish and dynamic flair combines with all the traditional Ford small car strengths to create a confident, contemporary introduction to the next chapter of the Fiesta success story.

The new Fiesta opens another chapter in the story of the popular Ford small car that has sold more than 12 million units since its introduction in 1976. Charismatic and individual, the new model makes major strides in craftsmanship, quality of materials and product choice while continuing to represent Fiesta's traditional strengths of practicality, value for money, agility and safety.

The Fiesta is produced at Ford's plant in Cologne, Germany, for European markets. Fiestas built in Cologne are on sale now in South Africa and will soon go on sale in Australia and New Zealand. Early next year, Fiesta production begins at Ford's assembly plant in Valencia, Spain, for European markets and at Ford's state-of-the-art assembly plant in Nanjing, China, for the Chinese market.

Ford's Auto Alliance Thailand (AAT) facility in Rayong will begin producing the new Fiesta for other major Asian markets in 2010. At the same time, Ford is currently retooling its truck plant in Cuautitlan, Mexico, to build the new Fiesta for the United States and other North American markets.

Ford Motor Company (NYSE: F), a global automotive industry leader based in Dearborn, Mich., manufactures or distributes automobiles across six continents. With about 224,000 employees and about 90 plants worldwide, the company's core and affiliated automotive brands include Ford, Lincoln, Mercury, Volvo and Mazda. The company provides financial services through Ford Motor Credit Company. For more information regarding Ford's products, please visit www.ford.com.

Ford of Europe is responsible for producing, selling and servicing Ford brand vehicles in 51 individual markets. The first Ford cars were shipped to Europe in 1903 - the same year Ford Motor Company was founded. Ford of Europe now employs approximately 73,000 employees. In addition to Ford Motor Credit Company, Ford of Europe operations include Ford Customer Service Division and
22 manufacturing facilities, including joint ventures.

SOURCE Ford Motor Company
/CONTACT: Mark Truby, [phone], [e-mail], or Astrid Wagner,
[phone], [e-mail], both of Ford Motor Company
/Web site:

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: use this link on the day this article is published and the following day.


(END) Dow Jones Newswires
12-15-08 1044ET- - 10 44 AM EST 12-15-08

[maksim]

Leap Covered Call - SWHC - Smith & Wesson

Buy Stock @ $2.63
Sell Jan 2010 $5 @ $1

If Unchanged 61% Return, 56% Annualized
If Assigned 206% Return, 190% Annualized

Break Even - $1.63
38% Downside Protection

Reporting earnings today, the chart is bullish in some regards, and near the top in other views. Longer term, 1 year not going to matter.

With stock so cheap, doesnt make sense for calendar call. I would say this is an investment rather than a play.

You can even do it in an IRA.

[maksim]

Schaeffer's Research outlook.

What the Trader Is Expecting in the Coming Week: Will Triple Witching be a Nightmare Before Christmas?
By Todd Salamone, Senior Vice President of Research

As Wall Street faces another potentially volatile week of trading, investors could be presented with a multitude of short-term trading opportunities. Economic reports including industrial production, building permits/existing home sales, and the consumer price index (CPI) are just a few of the potentially market-moving events on tap for the week ahead.

Other catalysts include a meeting of the Organization of Petroleum Exporting Countries (OPEC), a decision on U.S. monetary policy from the Federal Open Market Committee (FOMC), as well as quarterly earnings reports from Goldman Sachs (GS) and J.P. Morgan Chase (JPM). And, let's not forget that Washington holds the keys to the future of the domestic auto market. Any developments on this front could provide additional twists and turns for the market this week.

The ominously named triple-witching expiration is also on tap this week. Despite its foreboding title, triple witching has actually provided an historical upward bias for the market. From January 2006 through September 2008, there has been a tendency for the market to advance, as the unwinding of bearish positions in the options and futures markets creates a tailwind for the broad market. In fact, 8 of the past 11 triple-witching expiration weeks have been positive.

Full Link
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=89796

[yuccamtn]

Technically I will convert my Jan2010 and a few Jan2011 vertical spreads to diagonals more likely than calendar spreads (same strikes). What turns me on is the ability to use my short calls dynamically rather than passively (as a leg of a rigid vertical). When my vertical turns against me, my short leg is showing a profit but my long leg has a larger loss. With this new flexibility, I can buy back the short call (book a profit, thereby lowering my basis on the long call. Then I can sell near term OTM calls to chip away at the basis of the long call. Depending on market conditions, I can decide almost month to month what strike I want to sell. Great flexibility to adjust to a highly volatile market.

Thiw way I don't have to wait a year or two to find out if my original market expectations are correct. And I can book profits throughtout the year. You gotta love options!

[iwjw]

[maksim]

Keep in mind that bull call spreads and calendar spreads are slightly different strategies.

Calendar spread, all you care about is time premium decay.

Bull call spreads, you are looking to capture a part of the move up, with limited downside and less money at stake.

[maksim]

One of the good things about covered calls, is that at any time, you can do a few things.

If you do passive covered call writing, all you care about is expiration.

If you want to do it more actively, you can at any point...

1. Roll up (Buy call back, and write one of higher strike)
2. Roll down (buy call back, and write one of lower strike)
3. Roll out (buy call back of near month, and write another a month out).

You can also roll up and out, down and out, etc. What you are trying to do is capitalize on the time decay of the call.

80% of all calls that are bought expire worthless. What you are doing, is making that money. If you think the stock will move up, and would want to capitalize on that, than you would write a call option out of the money, so if UYG is now $5.55, you can write the $7's. Less downside protection and less premium, but if called, you get the time premium, PLUS the gain from $5.55 to $7.

You can actually write a covered call, go away, come back at expiration, write other... and you would be ok!

[maksim]

No, it cannot. I called and spoke to my Proshares rep.

The only way for it to go to $0, is if the index falls 50% in a day.

The proshares are not based on a fixed point, but reset daily.

If uyg is $10 today. If index goes up 5%, uyg goes up to $11. The follow day, the percentage is based off of the closing price. It is not fixed like the early ETN's were with oil up and down at a base of $50.

[maksim]

Very good point. Depends on when it hits $10. I just want the time decay. If it goes to $10, then the Jan 10's also go up. If it is around $10 on friday, I would actually close out the spread. Otherwise, chance of it getting called monday or tuesday is early and small.

Other thing you can do is jsut buy shares on open market.

[inflationista]

i don't know the answer to that question -

good luck brohamino -

[chog]

Thank you!Can an ETF like UYG go to zero?? is this even a posibility??

[inflationista]

if it falls sharply you don't have to worry about the shares getting called -

if you think it's gonna rebound, then you can buy the calls that you wrote back while they're cheap and get ready to hit it again on the next pop -

[chog]

I am new at writing calls, I've been writting puts out of the money so far with moderate success...
Which is the best strategy if the stock goes down sharply?
For example in a position I am planning: UYG @ 5.55 and writting call mar/09 strike 5 @ 1.75. If we consider that the breakeven point would be around 4.4, what would you do if the stock falls sharply to 3 again like it did in November? Any strategies would be appreciated.

[yuccamtn]

Question on your VIP dec/jan spread. If VIP jumps to $10 next week you may have to cover by exercising the jan call, so you lose 0.75. Unlikely. But your expectation is that it will above 10.75 by jan expiration? How will you manage this spread?

The reason I'm excited (see my previous post) about the calendar idea is my expectation for the near term is neutral/bearish, but long term (year or more) it's moderately bullish. In the bear market we are in, I think this works great.

[yuccamtn]

Finally - maybe a lightbulb flashes in my head.
I have a lot of bull vertical spreads (probably 35% of my portfolios) for Jan2010 - loooong time till payday - and too many things can go wrong in the meantime.
I should be converting my Jan10 short calls for shorter term short calls to be generating income during this year. Shorter term also means more foreseeable results. I think this is a solution for me.

Funny how we have mindsets. I always considered calendar spreads as danderous if they are at or ITM, because you always have more invested in the long further out calls (and can lose if called in an early month), but if you sell near-term OTM calls the danger of being called out is greatly reduced.

Thanks for planting the seed.

[maksim]

Sure,

Covered Call, lets say xyz.

You can buy the shares for $3, and write dec 08 $3 strike for
$.30.

If company goes bust, the most you can lose is $2.70. You lose the shares, but keep the premium.

Instead of putting more into shares, I bought an equivalent number of shares via a proxy, Jan 2010 $2.50 options.

When you write calls, for it to be covered, it simply means, if your calls get called, you can produce the shares. So you can write calls and still be covered if. 1. you own the shares outright. 2. have the shares somwhere else. 3. hold company stock options. or 4. Stock options.

So my proxy for the shares is the Jan 2010 calls. If the calls I write get called, and I am assigned, I can use my 2010 calls to exercise, and deliver the shares.

Same scenario. If XYZ dec calls sell for $.30, Jan 2010 calls sell for $1. I can write the calls against them. If company goes bust, most I lose is $1 I paid for premium for my 2010 options, minus the $.30 I receive for the dec 08 premium.

Only caveat, is unlike underlying stock, the longer term calls I have, will expire in the future.

The whole basis is that that take 2 options, same strike, only difference is months, the rate of decay for the time premium is much greater in the options nearer expieration, as opposed to longer term options.

The very same reason why alot of people are getting screwed on out of the money SKF options people bought that are out of the money.

[ksbirddog]

I've been selling covered calls.
I'm interested in what you did in the following instance:
So what I did with Ford, is instead of paying $2 a share then, just bought $2.50 calls, for Jan 2010 for a $1. I wrote dec 08 calls for $.40 cents, so 40% of my basis is paid for, in 8 days, Will write the next set, and voila, in 2 months, my 1 year long leap is paid for. I can either close out position, or keep writing.

Can I get you to explain this a little more. TIA

[maksim]

That is correct.

As long as you have at least as many contracts as you are writing against, and as long as they are at the same strike, or the ones that are longer term are lower strike, you are good.

If the one that gets written is called, you exercise your longer term call early. But typically, if it is in the money, you would just buy he written option back.

[inflationista]

so as long as you hold one option per option you write you're covered?

so instead of calling your shares do they call the option, or are you saying that your 2.50 price is locked in? and you'd exercise your jan 2010 early...?

cool - :)

[maksim]

Was going to say, Since GNW such a cheap stock its all good, depend on cost basis.

I started doing calendar spreads on options after my WAMU experience. Since in my Roth and Traditional I could only do covered writes, I bought wamu shares, and kept writing calls against them. Then wamu went bust. =P

The good, options saved me 30% of hte loseses. So made a 10k loss down to 5 or 6k or so. Bad news, it was a loss. So my takeway from WAMU was the following.

Avoid buying gamble stocks outright, and do it on a basket instead. That, or if you look at the post I had before, trading rules, or maybe I didnt post it yet, dont have any one holding be more than 25% of your holdings under 10k trading account, or 10% of a more than 10k trading account.

So what I did with Ford, is instead of paying $2 a share then, just bought $2.50 calls, for Jan 2010 for a $1. I wrote dec 08 calls for $.40 cents, so 40% of my basis is paid for, in 8 days, Will write the next set, and voila, in 2 months, my 1 year long leap is paid for. I can either close out position, or keep writing.

With UYG, did the same thing.

While options are a gamble... you know exactly how much you stand to lose, less you are writing naked calls.

So if you have $2k of stock you would buy typically, you should not be buying $2k worth of options that control $20k worth of stock. As long as you are disciplined, you can do very well.

One of Dennis Gartman's rules which I love, and did not know others followed till I started following him. Typically you have people who trade, er invest fundamentals, and others trade technicals. Gartman's whole trading mantra is make desicions based on fundamentals, when they are supported by technicals.

Hope that helps.

[inflationista]

done. person mark and board mark for you sir, good ideer -

[FiremanDave]

Sounds good.

[maksim]

Send me a private message with email, I will send you the call calculator I have, you can add commissions and all.

30% for 37 days or so aint bad, annualized of 300%.

It could very well be called away early which would be a win for you if you are ok with the gain.

Also, you do have a descent downside protection. Then in Jan, you can roll up, let me it be called away, but topic for different day.

[maksim]

Ford's biggest thing is for GM/Chrysler to survive.... as the supplier are the same.

In the long term, if GM struggles, would be good for ford to take their market share.

for ford, its a fine line... need gm to be ok, but not amazingly well,

If GM/Chrysler go bankrupt, it will have a bad effect on supplier, and the image in general.

Otherwise, Ford doesnt need the money, just a fallback if need be. When credit markets survive, they can refinance.

On the other topic, Calendar spreads/ Option backed buy - writes, while you dont tie up your cash, you do have to have margin in the account as it is considered a calendar spread, and requires level 1 margin in the account. I think bare min $2k?

Otherwise, to buy calls, even if you only have $250 in account, you can buy as much as you want with options.

With calendar spread, even if it costs you $250, you need a min of 2k i believe as margin.

[inflationista]

maksim - what is a good premium to make for holding?

i sold 20 $2.5 jan GNW calls today for .60 -

since i have the shares, which were trading at 2.50 at the time i figured i was getting a 24% premium for the outlay - is that the correct way to figure it?

60/250?

if not, what is the correct way? if so, what is a good value range?