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Coveredcalls

OPTIONS TIP: COVERED CALL CANDIDATE TRADE SELECTIONRecently, I've posted a number of ideas of covered call setups, but which one or ones do I choose? I can naturally try to put all of them on, but for various reasons I may not want to do that ... . So how do I cull out the wheat from the chaff? The UNG, GPRO, HUN, MW, and JCP ideas are the result of quite a bit of work already; out of these, are some better than the others? Naturally, the selection choice is somewhat subjective, but I do think a couple of these have slightly more going for them than others. Were I to be stranded on a dessert island and could only take 1 or 2 covered calls to the island with me, I'd probably go for UNG and JCP. Why? They are the most liquid underlyings of the bunch, which at least partially insures a fairer price for my setup than the other plays; bid/ask spreads are wider in the others, which potentially makes getting fills at the mid price more of a headache. UNG and JCP also offer weeklies, which offer a little bit of more flexibility in terms of rolling my short call (although this is not the kind of deal breaker it is when I'm doing short strangles, where I really want to have those weeklies to do short-term rolls with if I need to). Were I to have to rank the plays, it would be a close call between GPRO and HUN, after the UNG and JCP plays. GPRO's not as liquid as UNG and JCP; then again, its liquidity isn't terrible, it offers weeklies, and has quite a bit of volatility in it such that the premium received for the short call is fairly rich (in fact, its IV is higher than in UNG, JCP, or HUN), but a potential downside is that I'd have to devote about $1700 in buying power to the trade (100 GPRO at 18.22; Feb 19th 19 short call) and that might of concern to smaller account holders. HUN has better liquidity than GPRO, but no weeklies, but it's also cheaper than GPRO, so ties up less buying power. MW is the least liquid of the bunch and has no monthlies ... . The other factor that you might want to look at is correlation. For example, I've already got a long natural gas play on via CHK. Do I really want to increase my exposure to natural gas? All of these factors -- liquidity, availability of weeklies, current implied volatiity, correlation, buying power -- should be evaluated in considering which plays to go with ... .
AMEX:UNGLong
by NaughtyPines
OPTIONS TIP: WHAT TO LOOK FOR IN A COVERED CALL SETUPI've been looking at quite a few of these setups lately, so thought I'd post a bit of what I'm looking for in these. 1. Implied Volatility. As a premium seller, high implied volatility rank and high implied volatility in an underlying are my general signals as to whether to consider a trade. This is because higher implied volatility results in richer premium, and you want to sell richer premiumed short calls in these setups to reduce your cost basis more dramatically or, at the very least, reduce it to such an extent that your breakeven for the setup is favorable to a profitable outcome. 2. Price. This is a purely subjective element in my decision-making process. The question always is: "How much do I want to devote in buying power to this trade?" That being said, there is obviously less risk as a general matter when you put on a covered call in CHK, for example, as compared to CMG. If CHK goes to "0", for example, I'm only out $445 maximum (although I do keep the premium for the short calls sold); for CMG, I'm out $49500 (minus the value of the short call premiums collected). This is the very reason why I like to restrict these plays to underlyings that are valued $20 and less. Even if the underlying goes totally belly up, I'm not left on the street corner with a tin can ... . 3. Due Diligence. I tend to do far more due diligence with covered calls than I do with short strangle earnings plays. A lot of these covered call plays, after all, are partly attractive because the underlying has been severely battered for one reason or another, and I naturally want to know if there is risk associated with that reason such that a covered call doesn't make sense or poses more downside risk such that I could be in the trade for far longer than I consider ideal. 4. Break Even Metrics. For obvious reasons, having a setup breakeven below some significant price inflection point (52-week low, etc.) presents a more attractive setup than one that is "in the middle of things." 5. Correlation. Various sectors experience heightened volatility at various times. Don't overdo working a particular sector, even though that seems to be the profitable way to go in the short run. Look at all the possible plays and work the most potentially profitable among them. 6. Covered Call Screeners. I do use a covered call screener, but this is largely to "cull the herd" down to some kind of manageable number of plays to examine. These screeners suffer from a number of flaws, not the least of which is the usual suggestion that I go way farther out than 45 days with my short call to take in enough premium to make the play attractive. 7. Profit Taking. I look to take profit intratrade if the entire setup is in profit equal to what I would get if called away for the price of my short strike. If my short strike at some point is nearing worthless, I look to either take it off near worthless or roll it out to capture additional premium and further reduce my cost basis in my underlying position.
NASDAQ:GPROLong
by NaughtyPines
GPRO -- COVERED CALL/SHORT STRANGLE IDEASEven though GPRO appears to be in a bit of a consolidative state here, volatility in the underlying remains high, with a currently implied volatility rank of 83 and an implied volatlity of 87. Translation: rich premium to be had. I currently have a short strangle on, so I'm not going to be putting anything on here, but I figured I'd share nonetheless. There are two possible setups: Covered Call 100 GPRO at 18.22 Sell 1 Feb 19th 19 Call Whole Package: $1718 (meaning your break even is $17.18 per share, excluding fees/commissions) Max Profit: $182 (if called away at $19). Short Strangle Feb 5 13.5/23 short strangle POP%: 76% Max Profit: $108/contract BPE: ~Undefined (Off Hours) BE's: 12.42/24.08 Notes: GPRO's earnings are currently scheduled to be announced on 2/4, so both setups would run afoul of that. I wouldn't necessarily let that put me off throwing on a trade, but would look to take off the short strangle in particular in profit short of the earnings announcement, just so that my setup wasn't ripped about with earnings related price action. With the short call in the covered call setup, I would be a little bit more psychologically comfortable straddling earnings, but would look either to roll out the short call in the covered call setup to take advantage of heightened volatility and therefore enriched premium or take the whole setup off at an opportune moment, such as when price breaks 19 ... .
NASDAQ:GPROLong
by NaughtyPines
OPTIONS TIP: THE "POOR MAN'S COVERED CALL"As I'm waiting to dry some powder out between earnings seasons, I'm boning up on options setup fundamentals (doesn't hurt to go over them now and again), new potential trading setup ideas and the like ... . I like this one where I just don't feel like tying up the buying power on an ordinary covered call ... . It's basically an uber long diagonal: www.dough.com A "poor man's covered call" (PMCC) could potentially be a better, long-term background trade than iron condors in index ETFs since you basically set it up and largely just manage the front month short call. That being said, it ain't cheap to put on (even though it's cheaper than a regular covered call) ... .
AMEX:SPY
by NaughtyPines
SUNE -- A SECOND DIP AT THE COVERED CALL WELLWith SUNE still offering stellar premium for a slightly OTM short call, I'm taking another dip at the covered call well in spite of the fact that it has run up nearly 100% from its 11/19 low and before the volatility bleeds out of it: SUNE Covered Call 100 Shares at 6.25 1 Jan 29 6.5 short call Entire Package $491 (which will also be your cost basis in the shares) Max Profit: (If called away at 6.5) $159 Look to take the trade off as a unit if profit exceeds the "called away" profit ... .
SLong
by NaughtyPines