# writing covered calls



## rookie (Mar 19, 2010)

I was wondering how to go about it. really. heres what happened at my first shot.

strategy was to buy an individual stock paying a good dividend at the right price which you want to hold on to in the long run. then start writing those calls and make a few extra bucks with it. i spotted one such, bought it and after a few days, wrote my first covered call for current month's contract with 3 weeks to go. i chose a price which was 2$ higher than my purchase price and made 1$ in premium. before the 3 weeks, the stock soared and i had to buy back the option at a higher price since i did not want to lose position of the stock. the same story repeated again last month. now, this month, i see the same thing happening but i am not willing to take another hit on the buy back. i have decided to lose position of the stock. 

however, this has been a good learning experience. what exactly are safe strategies to make money writing covered calls? should i write them over longer terms? at prices below my purchase price?


----------



## andrewf (Mar 1, 2010)

Buy a covered call ETF and call it a day. I don't think it's worth managing yourself unless you enjoy poring over options greeks on a daily basis.


----------



## humble_pie (Jun 7, 2009)

covered call writing is a fine strategy imho. I always have 20 or 25 of them going on, plus another bunch that are strategies replacing or replicating covered calls to a certain extent.

i don't get assigned, myself. In rising markets i roll things forward & up, in falling markets forward & down. It's remarkable how rare it is that options have to be bought back at a loss to prevent assignment, as you have been doing. (hint: don't work so close to expiration date.)

without knowing what your underlying was, it's impossible to know whether a strike price only $2 above market was a large or small increment. Two dollars above a volatile $80 stock is a piffle, while the same $2 increment for a dormant or non-volatile $16 or $18 stock would be an olympic high jump. In other words, the setting is all-important. (hint: what is your stock's trading range & what are the option IVs.)

a prudent manager wishing to drive forward an optionable portfolio for many years to come will go out farther in time in order to harvest a higher strike price yet with a decent premium. It's also possible to increase yield by selling strangled covered calls, which means including the sale of some otm puts as well as otm calls.


----------



## Causalien (Apr 4, 2009)

For short term covered calls, I use bollinger bands at 2 sigma deviation as a basic tell of what strike price to write. Of course add some adjustment for the option premium/price.

Basically you adjust it so that, the premium make at least 20% per annum writing covered calls. Otherwise, I think buying/selling stocks in a range with stop losses is more efficient.

Rolling, IMO is just another form of buying back and reselling the later month option. I usually just let the stocks get assigned since two sigma deviation is pretty high for 1 month's profit and often associated with a breakout out of a channel. In which case, you should've sold the stock anyway.

Note that my strategy is very different from Humble's. He's is even longer term.


----------



## Lephturn (Aug 31, 2009)

Bollinger bands are a good way to visualize standard deviation over time. I also like to use Jeff Augen's spike chart to see how volatile this stock has been.

http://www.thinkscripter.com/indicator/standard-deviation-price-change/

I'll also make sure I pay attention to earnings and how that correlates to past spikes and use that to play what expiries and strikes I pick. I also like to go further out in time - 3-4 months is more my speed. This often gives me the luxury of riding out situations where things get close to my strikes.

Much easier to do this on the more liquid US markets. In the Canadian I am using CC ETFs like ZWB.


----------



## humble_pie (Jun 7, 2009)

leph is right. Option seller has to pick his future strike price & date carefully, according to the history & TA the underlying stock displays.

& cause is right. (i guess that makes me centre.) Rolling is indeed just another form of buying back an option while selling another, sometimes at a different strike, usually farther out in time, a majority of the time at a profit if the trader works it right.

contrary to standard advice, i don't wait until the last minute. I wait until time decay has eroded a good part, but not all, of the near call's premium. At such point in time there are still numerous players & its easier to get an advantageous price.

then i wait for a falling market day, when gamma/theta will support the price of the farther option (the i'm planning to sell) while eroding price of the nearer option (the one i'm buying.) A severely plunging market day & i'm in clover heaven.


----------



## Causalien (Apr 4, 2009)

I hope the three of us are not confusing people here.

It is important to understand that we are three different people with 3 different strategies that have been time tested to suit each one's temperament. The metric we each use fits our personality and our abilities best and thus works and is only part of the overall grand strategy.


----------



## humble_pie (Jun 7, 2009)

what's to confuse ? options are tricky. The best teachers of all time will be the first simple strategies that new options traders get to carry out by themselves.

the OP asks how to continuously sell calls while never being assigned even in a bull market. This is tricky but doable. There are many ways to choose a strike price & date to sell that will be less likely to trigger assignment.

one by one, leph, right & centre have offered up suggestions here in this thread. All are valid.

there is no simple modality for trading options & parties who call for the same are wasting everybody's time. Options are tricky & the initial learning curve is steep. There is no way forward from leph, right & centre except to climb up the steep, slippery challenging slope one rock at a time, just like general wolfe climbed the cliffs of quebec to the plains of abraham.


----------



## andrewf (Mar 1, 2010)

Interesting posts, all. I suspect I may have given the OP the best advice though: don't do it.


----------



## rookie (Mar 19, 2010)

i definitely need more education before i can successfully write the calls without being assigned.

@andrewf, i do not want to give up just yet. the risk in this strategy is very very minimal.


----------



## humble_pie (Jun 7, 2009)

rookie your education is proceeding apace. Excellent student. A+ on mid-term.

pay no attention to the slight chaos. It's normal, will clear up. It's good that you are sticking with conservative strategies in the meantime, these will give you little or no pain.

lephturn is right, go to US option markets if you can. Even with a canadian stock, if it's interlisted & if the US market is decently liquid, always go to the US market. I'm assuming, of course, that you don't sell to or pay to the natural bid/ask prices. It's in US option markets that you'll get the flexible pricing that you want, while the montreal exchange will just up & massacre you.

a useful by-product of canadian stock interlisteds with US options is that gains from selling those US options are a form of gambitting. Those USD received from selling calls or puts will be 100% free of FX fees, just like a gambitted stock.


----------



## Dmoney (Apr 28, 2011)

How do taxes work on selling covered calls on US stocks? Are they considered capital gain or do they reduce the ACB until the underlying is sold? Is there any amount witheld?


----------



## alphatrader2000 (Aug 18, 2010)

rookie said:


> I was wondering how to go about it. really. heres what happened at my first shot.
> 
> strategy was to buy an individual stock paying a good dividend at the right price which you want to hold on to in the long run. then start writing those calls and make a few extra bucks with it. i spotted one such, bought it and after a few days, wrote my first covered call for current month's contract with 3 weeks to go. i chose a price which was 2$ higher than my purchase price and made 1$ in premium. before the 3 weeks, the stock soared and i had to buy back the option at a higher price since i did not want to lose position of the stock. the same story repeated again last month. now, this month, i see the same thing happening but i am not willing to take another hit on the buy back. i have decided to lose position of the stock.
> 
> however, this has been a good learning experience. what exactly are safe strategies to make money writing covered calls? should i write them over longer terms? at prices below my purchase price?


Writing covered calls is probably one of the worst strategies. all you are saying is that you are participating on the downside 100% and participating on the upside up to the strike price you have written the call. Theoratically, this strategy MAY work well for stocks that trade in a band. A covered call ETF will underperform an ETF with same stocks not writting the calls.


----------



## humble_pie (Jun 7, 2009)

dmoney this is the wonderful thing. Right now canadian tax authorities recognize capital gains realized anywhere in the world. So gains from selling US options are taxed as capital gains, just as are gains from selling canadian options.

the wrinkle with both is that taxpayer has to buy the option position back, ie "close" the position. This would normally be done just prior to expiry if it hasn't already occurred. Yes, it's a drag, and an extra cost, but otherwise there is a risk that the tax authorities may regard income from option sales as straight income & therefore may deny the 50% capital gains exemption.

(edited PS) no US withholding on sales of US options. Make sure they occur in a US account so as to avoid broker's FX fee. In the rare case that it's a TD rrsp account, enrol for automatic washing of US funds so as to wash those option sale proceeds into US money market same day ...

(note to alphatrader) you are one hilarious joker !! are you still calling yourself Professional Trader lol ?


----------



## m3s (Apr 3, 2010)

humble_pie said:


> the wrinkle with both is that taxpayer has to buy the option position back, ie "close" the position. This would normally be done just prior to expiry if it hasn't already occurred. Yes, it's a drag, and an extra cost, but otherwise there is a risk that the tax authorities may regard income from option sales as straight income & therefore may deny the 50% capital gains exemption.


Very interesting. So if it wasn't exercised you just have to exercise it yourself at the cost of a trade. I had assumed writting options generated income

Now I wonder how much capital I'll need to acquire before I can live off of writing options (from my iPhone on the beach) Maybe I will blog about it as backup income


----------



## humble_pie (Jun 7, 2009)

no, absolutely do not exercise your long option for both tax & commission reasons.

commish: an IB client gets free option exercises but everybody else pays through the nose. Commish for exercise is always noticeably higher than for a simple trade & at some brokers (ouch) is the full commish that would be charged for a phone trade with a licensed representative.

tax: reasons for don't-exercise are that the option costs/proceeds then get added to the ACB of the stock. I personally find this is extra difficult to keep track of because stock may not be disposed for years & years, meanwhile there are too many niggedy-naggedy ACB details to record. So i pretty much deal with my options on a tax-year basis. I sells em & i buys em back within the same tax year, which for me as for most people is the calendar year.

sales of options thus traded are treated as capital gains, do not get added to underlying stock's ACB.

what does investor do if he holds in-the-money long options but for above reasons should not exercise ? He sells em, of course. He'll receive the intrinsic value plus can probably capture a slight premium if he acts during the week prior to the week in which the option expires ...

please keep in mind that this thread is about the opposite strategy. It's about writing covered calls. In this strategy, investor owns/goes long the stock while he sells/goes short the call option. Such an option is a short call.

investor cannot exercise this option. Only the counterparty (long holder of this call) can exercise.

this is what happened to our OP. Next, he will possibly learn how to dance around during the game so as to escape exercise ...

once learned, dancing is easy to do by smartphone while lying flat on a beach. Keep off the single malts until trading is done for the day, though.


----------



## Dmoney (Apr 28, 2011)

humble_pie said:


> dmoney this is the wonderful thing. Right now canadian tax authorities recognize capital gains realized anywhere in the world. So gains from selling US options are taxed as capital gains, just as are gains from selling canadian options.
> 
> the wrinkle with both is that taxpayer has to buy the option position back, ie "close" the position. This would normally be done just prior to expiry if it hasn't already occurred. Yes, it's a drag, and an extra cost, but otherwise there is a risk that the tax authorities may regard income from option sales as straight income & therefore may deny the 50% capital gains exemption.


For example, let's say I buy a stock for $30 and write 5 covered calls in 5 consecutive months for $1 each (strike price $31 say). To be taxed as capital gains do I have to buy back my calls (say 25cents each) or can I not just let them expire?

I was under the impression that my new ACB would simply be $25 and when the underlying was exercised/sold I would pay capital gains based on the new ACB. (ie no tax paid until underlysing actually sold?)

From CRA documentation I understood that investment income could only be considered regular income if the # of trades was substantial, or the % of income received from investment was substantial. If neither of these are the case can I get away with a strategy of simply writing calls and letting the market run its course?

Appreciate any clarification.

(edit)
I plan to be short the option in almost all cases. I get that gains from long options are capital gains like your latest post clarifies.


----------



## Causalien (Apr 4, 2009)

alphatrader2000 said:


> Writing covered calls is probably one of the worst strategies. all you are saying is that you are participating on the downside 100% and participating on the upside up to the strike price you have written the call. Theoratically, this strategy MAY work well for stocks that trade in a band. A covered call ETF will underperform an ETF with same stocks not writting the calls.


Laughed at this as well. By your own reasoning, Covered call strategies outperforms the market when used on stocks that trade in a channel. Bring up any chart and you'll find several channels. Unless, you are doing penny-like stocks. I agree with the ETF part though. I don't trust that the ETF managers are that great at option pricing.

Thanks humble. I had been marking options as income for a while, now I am going to assign them as capital gain. Not that it changes my tax that much. I am very interested in finding out taxes and complicated strategies. Say I sold LEAP call, bought LEAP put and does an iron condor with some actual stock holding. How does that work tax wise? Is there a website that explains it?


----------



## Lephturn (Aug 31, 2009)

I always buy back options instead of letting them be exercised or even waiting for them to go out worthless.

Well maybe not always - but the vast majority of the time if I sold an option for say - .75 I'll put a limit order in good till cancelled to buy it back at 4 cents. With Options Xpress I get a reduced commission on that order (anything under a nickle) and it lets me grab the vast majority of my profits. If it's way out of the money and on something that doesn't move much - like say Microsoft - I may let it expire instead, but in most cases I'd rather take the risk off the table than risk an adverse move for less than a nickle.


----------



## humble_pie (Jun 7, 2009)

dmoney says:

_" For example, let's say I buy a stock for $30 and write 5 covered calls in 5 consecutive months for $1 each (strike price $31 say). To be taxed as capital gains do I have to buy back my calls (say 25cents each) or can I not just let them expire? "_

what, no assignments ? let's see now, stk at 30, short calls at 31, sell 1-month call option at 1.00 premium, every month for 5 months ?

won't you please tell us, what is this cornucopia stock ? anything this dull should have 1-month calls priced maybe something like .19-.35. But wowers this limp pickle is paying you call premium at the rate of a buck a month or $12 per annum on a $30 stock ...

seriously though your questions are legitimate but go far beyond any anonymous message board. An accountant with experience in option reportage would help you, could at least get you set up. As you know, tax authorities like consistency, so it's a question of creating a reasonable tax reporting protocol & sticking to it.

cause says:

_" Say I sold LEAP call, bought LEAP put and does an iron condor with some actual stock holding. How does that work tax wise? Is there a website that explains it? "_

hmmmmn let's see now. You're going to 1) sell leap call, 2) buy leap put, 3) sell call, 4) buy call, 5) sell put, 6) buy put, & 7) buy stock. And you want a website to explain canadian tax consequences of the same.

i think you will have difficulty finding a chartered accountant to explain canadian tax consequences of the same. There certainly will not be 2 CRA representatives with identical explanations of the tax consequences of the same. And if you did find 2, you know what ? they'd be winging it anyhow.

the subjective impression i have is that the tax authorities are not 100% consistent in how they view all forms of options trading & will therefore accept an orderly taxpayer's account when this includes all trades & is based on one consistent & reasonable methodology.

dmoney's approach - adjust cost base of stock for all option sales - is acceptable save that it can lead to extreme examples & i have heard that the tax authorities do not like these. Extreme example: investor sells LEAPs calls against a stock & receives big premium, which he uses to write down cost base of stock. The following year, repeat. Following year, repeat. And so on, for 15 or 20 years. ACB is now hovering near zero but investor has not reported or paid one single penny from all those years of collecting $$ from LEAPs sales.

even more extreme example: investor repeatedly sells naked call options. There is no underlying stock whose ACB can be adjusted. The only way to report these that i know of is to report the cost of/proceeds from each transaction & claim the net capital gains/losses.

my own approach is record-and-pay-as-you-go. I try to close most option positions by rolling them forward. This has the advantage to tax authorities in that all closed transactions are reported & capital gains paid on a current basis.

dmoney i personally would not have to deal with your 5-trades-in-5-months situation because i'd sell one 6-month call at the outset, or possibly 3 months or 8 months, whatever. But certainly longer-term. So i'd have fewer trades to report for that one stock.

causalien re your LEAPs plus condor, i haven't done this, i sincerely hope you will understand when i say you need better advice than an anonymous message board. Would it help to clarify your tax approach if you thought about each of the component trades as a separate investment event. In your mind they may all be related as part of one coiled-up puzzle, but i don't believe the tax authorities give a fig about the puzzle. I believe they're more interested in the individual parts, ie what you sold, what you bought.


----------



## Causalien (Apr 4, 2009)

Consider the fact that I've been painfully reporting each transaction separately and marking most as income, I don't think the tax authorities will bother me. By not exercising, I can potentially mark my gains as capital gain, thus doubling the amount of profit I can make per year at lower tax bracket. I will have to re-evaluate my strategy to see if the increased profit justify the increased time in which the short term portfolio is not sitting in cash.

I know I shouldn't trust online anonymous board, but since I've gone through quite a lot of interpretations and still got surprised by something you brought, I thought I'd squeeze your brain a bit more for knowledge.


----------



## Lephturn (Aug 31, 2009)

humble_pie said:


> dmoney says:
> cause says:
> 
> _" Say I sold LEAP call, bought LEAP put and does an iron condor with some actual stock holding. How does that work tax wise? Is there a website that explains it? "_
> ...


Not to simplify things too much... but the answer so far is nothing isn't it? Until you start closing legs of this position there are no tax consequences.

I'm with humble in terms of accounting though.


----------



## humble_pie (Jun 7, 2009)

lepht once again you are right. So sorry that i didn't make that clear.
thank you for putting in the patch.

are we agreeing that, by & large, each of the 7 bits that comprise this coiled-up puzzle should be treated as a separate taxable event, once its closing transaction gets done.

the tax picture looks, of course, quite different from the map which puzzle man keeps in his head as he works his trades.

right, left ??


----------



## Causalien (Apr 4, 2009)

I've been reading through that document in mtl exchange.

It seems that whether or not anything is capital or income is decided by the trader himself from the mix of money generating assets in the account.
I am going to keep it as income since I have several strategies that doesn't include options which qualifies as income and things that can be written off from the "income" part. This and the fact that the document almost "suggests" that I will get audited if I turn a 180 now and change the accounting method.

Seems that as long as its consistent with previous years, I should be fine.


----------



## lefilter (Mar 4, 2011)

humble_pie said:


> then i wait for a falling market day, when gamma/theta will support the price of the farther option (the i'm planning to sell) while eroding price of the nearer option (the one i'm buying.) A severely plunging market day & i'm in clover heaven.


If youre looking to write at a specific strike price, wouldnt the falling price of the underlying stock drive down the price for the call, even if the added volatility (and other greeks) supports it a bit?


----------



## humble_pie (Jun 7, 2009)

it's not just "the" call. It's a pair of calls.

this is not about the initial startup, when stk is bought & calls get sold. This is about the next stage, about rolling those calls forward. About not getting assigned. About nailing down the capital gain from the call sales.

here's an example in xgd. Let's say investor presently holds stk & is short xgd dec 26 calls.

for various reasons investor chooses to roll into jun 27; that is, he will buy back dec 26 & sell jun 27.

this is a credit spread that can be expected to increase as time value in xgd dec 26 decays.

in addition, xgd dec 26 is more responsive to market price of xgd itself. As i mentioned above, if xgd itself drops, gamma/theta will tend to stabilize bid/asks in xgd jun 27 while allowing b/as to drop faster in xgd dec 26.

so a party intending to buy dec 26/sell jun 27 will watch & wait. Will act prior to 3rd friday in december, but will only act on a sharply falling day in gold.

falling markets = pigz clover heaven for covered call writers.


----------



## Lephturn (Aug 31, 2009)

lefilter said:


> If youre looking to write at a specific strike price, wouldnt the falling price of the underlying stock drive down the price for the call, even if the added volatility (and other greeks) supports it a bit?


Yes - but you have to look at all the greeks - especially vega - volatility.

Let's look at NVDA last traded at 14.80

Let's look at the Dec 16 calls:
Bid 0.68	Ask 0.71	Vega 55.5	Delta .3834 Gamma 0.13

What if we roll out to March 16 calls?
Bid 1.45	Ask 1.49	Vega 53.4	Delta .4742 Gamma 0.08

So the deltas say that a $1 move in the stock will move the Dec 16 38 cents and the March 16 47 cents. Gamma says the near term option's delta will change more quickly. Both have fairly high vol - so a quick drop in the underlying that drives up vol will boost the price of both options.

So - let's say that the stock drops $2 and vega jumps 5 points. Stock now at 12.80 and IV at 61.78 for Dec 16's theoretically now are worth 0.248

What happens with the March 16 calls with the same stock and vol move? Theoretically it's worth 0.940.

So with a $2.00 drop in NVDA and a 5 point vol pop we theoretically end up with:
Dec11 16 Call was .71 now 0.248 so a .462 loss or 65% of it's value
Mar12 16 Call was 1.49 now 0.94 so a .55 loss or 37 % of it's value

So the answer is always "it depends" - but a good online broker will have an option pricing calculator so you can run this kind of "what if" scenario through the options pricing models and get a look at how the option price might react in different situations.


----------



## humble_pie (Jun 7, 2009)

yup this is what i mean.

when stk drops: nvda dec call (near) drops more than mar call (farther).

in a rollover spread investor is looking at the spread between ask in dec call & bid in mar call. He will find this increases/decreases according to above-mentioned factors. He is looking to carry out his trade at the moment of the greatest increase, according to his best judgment.

in my case i'm never just looking for favourable greeky spreads. I'm also looking for markets that are noticeably soft or weak on the side which is opposite to me, so i can obtain a better-than-natural price for whatever trade i do ...


----------



## Lephturn (Aug 31, 2009)

humble_pie said:


> yup this is what i mean.
> 
> when stk drops: nvda dec call (near) drops more than mar call (farther).
> 
> ...


Great point HP - I'm quoting Bid/Ask but that doesn't mean I actually do the trade on one or the other. Depending on the spread and the weakness or strength as you say, you can work a limit order to get a better fill.

As usual humble - great real world experience you are sharing - I thank you.


----------



## andrewf (Mar 1, 2010)

I'm curious if any of you guys are willing to share any return/volatility statistics on your covered call portfolios. How much value are you adding?


----------



## Lephturn (Aug 31, 2009)

andrewf said:


> I'm curious if any of you guys are willing to share any return/volatility statistics on your covered call portfolios. How much value are you adding?


I would share if I broke those out - but I don't. I rarely do pure covered calls - I'm a 'fraidy cat - I tend to collar more commonly with core holdings and in other cases I trade various spreads instead.

I haven't been actively doing this long enough to have meaningful numbers - only about a year and a half or so. I can tell you my low point was down about 8 % from the peak this year on my core holdings instead of the almost 18% it would have been in a normal portfolio where I just owned the stocks.

For something with some scientific validity - check these out:

OIC's updated covered call on the RUT study: http://www.888options.com/press/archive/2011/sep_14.jsp

Older but good collar study:
http://www.optionseducation.org/institutional/research/pdfs/umass_collaring_cube_summary.pdf
http://www.optionseducation.org/institutional/research/pdfs/umass_collaring_cube.pdf


----------



## humble_pie (Jun 7, 2009)

rookie i have been thinking about you (in a nice way, don't worry) & wondering to myself how you could have had 3 exercises in a row against you while i am almost never exercised against ... perhaps once or twice in 300 or 400 option positions.

i think perhaps a difference is that i intend never to be assigned. I do always have a bunch of good old canadian stuff that is always short its calls (have other parts of the portf for other activities, but this is the no-brainer cash cow part.)

but i'm careful to pick good old stuff that not only looks decent & pays a smart eligible dividend, but it must also have a highly liquid option market. That way there is always open interest in future option strike prices, so i always have something i can roll forward into.

in a worse case scenario - believe it or not this is when market soars, so the original calls come into the money - i will indeed have to buy those @!!&%$ back at a loss, but at least (stock being high in this scenario) the forward calls will have risen concomitantly, so i will have something to sell at a gain. Netted out, the stock will afterwards be positioned at a higher strike (good.) Meanwhile adjusting the call position upwards has likely brought me a small gain (acceptable) or a small loss (tolerable, because i'm still holding stk which has risen mightily.)

specifically when acquiring these canadian dividend dinosaurs i look for stock with not only active option markets but with active LEAPs markets. Because rolling forward into future LEAPs with their expensive premiums so as to benefit from selling these high premiums is the very last fortification wall in defending a do-not-assign stock position. It's the inner keep of the mediaeval castle, so to speak.

you didn't mention the stock which they stole away from you 3 times, but i think it might have been something with thin or illiquid option markets, hence bigger spreads & far fewer chances to defend the fortified tower.

next, another thing i do is keep watch high on the ramparts all the time. I don't just sell a call a call & forget about it, only to wake up one fine day & discover Oops they have crossed the moat & broken down the portcullis. 

eventually one learns to keep the watchman on duty with minimal effort. At any one time, i might have lots of open positions, but only 5 or 6 that require any attention.

this watchkeeping is important imho. For most of my short positions, from day one i constantly monitor the various escape strategies, in a low-key way that has become 2nd nature. Usually, there's no need to act. It's just a question of sweeping the horizons for signs of interesting or unusual movement.


----------



## rookie (Mar 19, 2010)

thanks for worrying about me humble. let me spill the beans. its twice that i almost got assigned, had to buy back both the times, havent got assigned yet though. the stock is grmn. i wrote the call options for 31 and then 32 and i had to buy back since the stock graciously floated above the strike. this month i had written a call at 34. it soared past 35, but has now perched slightly above 34. the buy back is still expensive (more than what i sold for). hope it stays under 34 until the expiry.


----------



## humble_pie (Jun 7, 2009)

is this garmin, rookie ? interesting pick. Never heard of this co. Taking brief birds-eye. Just grazing.

info a bit contradictory ... volume not enough to support rip-roaring options ... at first glance call options appear to be underpriced ... co announces earnings tomorrow 2 nov/11 ... are there rumbles about cutting the div ... something about deferred earnings ...

speaking of dividend what kind of withholding does a canadian suffer on em ... swiss WH is 35% ouch ... even if one holds garmin in rrsp where there will be no US withholding, nevertheless surely helvetica will subtract her 35% NR ...

this is a serious company. Perhaps we could call on mode ? Schaffhausen is not far from the nato AFB where he is stationed & mode is always up on these gadgets & systems ... mode, if you're listening, do you know why the market seems to be saying garmin is headed towards the south ?


----------



## Lephturn (Aug 31, 2009)

humble_pie said:


> next, another thing i do is keep watch high on the ramparts all the time. I don't just sell a call a call & forget about it, only to wake up one fine day & discover Oops they have crossed the moat & broken down the portcullis.
> 
> eventually one learns to keep the watchman on duty with minimal effort. At any one time, i might have lots of open positions, but only 5 or 6 that require any attention.
> 
> this watchkeeping is important imho. For most of my short positions, from day one i constantly monitor the various escape strategies, in a low-key way that has become 2nd nature. Usually, there's no need to act. It's just a question of sweeping the horizons for signs of interesting or unusual movement.


Another great post. Nice analogy - this one is a keeper! Can we convince you to write a blog - or a book?

I don't have my exit strategies down as well as humble - and they are not quite second nature yet - but this is just what I'm working towards. Planning various exit strategies before you enter a trade is what we should all be striving for.


----------



## Causalien (Apr 4, 2009)

Garmin, GPS maker. Can say that it is a monopoly. Growth is nil since saturation is almost maxed. Soon to be replaced by google maps and anybody with a smart phone. Long term , there is no more innovation and upside. Short term it follows the car market. 

Price per unit has fallen from $500 to $100 within the past 3 years. Newer cars will have them built in to the dash. Further reducing the worth of each unit. Eventually, compains will just lease it's data, at which point , it will be competing with google maps directly. Estimate time to company death if no more innovation. 5 years.


----------



## lefilter (Mar 4, 2011)

Lephturn said:


> So with a $2.00 drop in NVDA and a 5 point vol pop we theoretically end up with:
> Dec11 16 Call was .71 now 0.248 so a .462 loss or 65% of it's value
> Mar12 16 Call was 1.49 now 0.94 so a .55 loss or 37 % of it's value
> 
> So the answer is always "it depends" - but a good online broker will have an option pricing calculator so you can run this kind of "what if" scenario through the options pricing models and get a look at how the option price might react in different situations.


Thanks to you and HP for clearing that up, this stuff is nice!

For now i keep my call writing to a minimum to build up experience, and it looks like the rollover spread is high on commission if you're rolling on a 2-3 months basis. Does it makes sense to keep a more "passive" approach when notionnal is relatively small? ie : waiting till time value is mostly 0 but option is still liquid, and rolling then.

Secondly, what do you do when you're in the "danger zone", where you could get assigned? At the beginning of the option's life, if the stk goes above strike, the guy on the other side is probably not gonna call you, he's gonna sell his call instead, more money for him this way.

So, if you're short a call and it goes ITM, do you have to constatly monitor the moment where it makes more sense for the other guy to call instead of selling his call? Or you just roll foward the second the call goes ITM? Im struggling on this one...


----------



## ddkay (Nov 20, 2010)

Garmin gets their maps from Navteq (Nokia subsidiary), otherwise there is TomTom and TeleAtlas (subsidiary of TomTom)

So Garmin is basically only a device maker


----------



## humble_pie (Jun 7, 2009)

filter a widespread misconception is that when options go into the money, they are somehow magically exercised. Nothing could be further from the truth.

nearly always, a buffer of premium remains in the option bid. It may not be very much, may even be less than a penny per share, but it will largely suffice to insulate that option from assignment.

translation: exactly as you have figured out, the long holder of the option will receive more $$ if he sells the option instead of exercising it. There are exceptions however.

exceptions are old ditm options whose time value has decayed to almost zero & whose underlyings either have large dividends or are involved in a poorly-understood spinoff, re-org or merger. These options are at risk of early assignment on the day prior to an X date.

here are a couple of formulas that help to determine when an option is at risk of early assignment (notice the word *help*) (formulas are indicators only):

CALLS: when (stock minus strike) > option bid = risk of assignment

PUTS: when (strike minus stock) > option bid = risk of assignment


----------



## avrex (Nov 14, 2010)

humble_pie said:


> here are a couple of formulas that help to determine when an option is at risk of early assignment (notice the word *help*) (formulas are indicators only):
> 
> CALLS: when (stock minus strike) > option bid = risk of assignment
> 
> PUTS: when (strike minus stock) > option bid = risk of assignment


+1
Thanks, humble.
As you mentioned, even though these are just indicators, it is still very helpful.

I have added a column in the spreadsheet where I track my options, to watch this value.
After entering this into my spreadsheet, I realize that my short positions are in no immediate danger of early assignment.


----------



## rookie (Mar 19, 2010)

finally, i let my GRMN get assigned at 43$. its now trading at 47+. cause, so much for your bearish outlook on it.


----------



## Causalien (Apr 4, 2009)

Hey, you can be bearish on a stock and not trade it because it's not bearish enough. I am beginning to realize that when I express bearish views, people think that I am taking a stand and saying "SELL". No, I am just expressing my skepticism which led me to invest in something else and not the stock I am bashing. I still don't see anything good with Garmin's future. 

It's what I actually buy and sell that has more weight. But for those, I usually don't do recommendations or voice opinions because of future libel shitstorm.


----------



## peterk (May 16, 2010)

Dragging up an old thread here but it seems like the right place...

Is buying a call against the US listed stock of an interlisted Canadian company, while holding the TSX Canadian stock, considered "covered" still?

My unregistered margin account is with IB and I think I only have the level 2 or basic options trading permissions. I hold shares of TCK.B in this account and want to write a call or two. Can I write naked (not really) calls against TECK? Will this complicate things more than normal, tax-wise, assuming I follow the above advice and close out the position for a few pennies before expiry, claiming a capital gain?


----------



## humble_pie (Jun 7, 2009)

peterk said:


> Is buying a call against the US listed stock of an interlisted Canadian company, while holding the TSX Canadian stock, considered "covered" still?



you would be selling the call, not buying it, no? _long stock + short call_, goes the covered call rule.

assuming you mean selling the call in US account while holding TECK.B in canadian account, you're onto a good idea. Those US options are far more liquid than the ones trading on sleepy montreal exchange, so it will be easier to get the job done. 

plus sold USD options on canadian underlying stock are a form of currency gambit. No FX fee whatsoever on the premiums received. Good idea for someone who wishes to accumulate USD painlessly.


on the negative side, the option trader should keep in mind that assignment will be in US dollars, so if USD goes down he will not receive the CAD equivalents that he might be expecting.

he also needs to never forget what he has done. Normally there are no reminders. He needs to keep in mind at all times the possible effect on his US margin if an assignment of a covered call occurs. He needs to monitor frequently, he needs to be ready to journal the stock over from CAD account to cover if assignment occurs (most likely he will have to alert the broker to do the journalling; most broker systems cannot peer across the border)

.


----------



## peterk (May 16, 2010)

Ah, yes I meant sell the call, obviously.  Thanks HP.

So if the stock kept rising and it went into the money and the premium price rose so much that assignment was likely, I would have to either to a) have the USD cash to buy the option back (potentially a lot) b) use margin and convert to USD and buy the option back, c) journal the shares, get assigned and receive USD.

I'm not entirely clear on how margin works... Never used it and no near-term intentions to. So if the position goes terribly against me, and my $1/share option sale turns into a $20/share liability, and I don't have enough margin, then the broker may automatically liquidate holdings to cover the cash demand? and this is one of the things I need to "monitor frequently" to make sure is not at risk of happening?

Margin would not be a concern for covered calls though if they were both the US exchange entity, right? So if I journaled a couple hundred shares to the US side and sold those covered calls there wouldn't be a margin concern at all?

Of course, I would need to monitor these positions carefully anyways and exit if need be, assignment isn't a option (heh). I've got a huge capital gain on TCK.B that I don't want to trigger.


----------



## humble_pie (Jun 7, 2009)

peterk said:


> I would need to monitor these positions carefully anyways and exit if need be, assignment isn't a option (heh). I've got a huge capital gain on TCK.B that I don't want to trigger.




avoidance of assignments that would trigger a sale with big capital gain consequences is a key reason why a covered call writer often rolls his positions.

in the case of your TECK, might i suggest that you not begin with this stock, with its potential high gains if assigned. Can you find instead a stock with only mild gains, so that if you're assigned the gains would not be too heavy.

one approach to preventing assignments in rising stocks is to sell calls with higher strikes in the first place. These have lower premiums. Not a setback at IB; however investors at brokers with higher commissions go farther out in time in order to capture a premium that will make the effort worthwhile (for example i myself would not be selling anything prior to jan/18s right now.)

the classic remedy when stocks pass the option strike price point, is to buy back one's short call for a loss & simultaneously sell another one with a higher strike plus farther out in time. A rollover spread. Often one can do these as credit spreads. In a worser case scenario one will have a debit spread. 

these are trickier to do successfully than the above sounds. A new option trader needs to have a feel for TV pricing & something of an understanding of the greeks, in order to trade these pairs successfully. Only experience can teach this feel, which is why my hope with a new option trader is that he will start by selling calls whose assignment won't matter tax-wise, as mentioned above.

margin won't be an issue for you, since you will own the underlying & can deliver it.


.


----------



## peterk (May 16, 2010)

humble_pie said:


> avoidance of assignments that would trigger a sale with big capital gain consequences is a key reason why a covered call writer often rolls his positions.
> 
> in the case of your TECK, might i suggest that you not begin with this stock, with its potential high gains if assigned. Can you find instead a stock with only mild gains, so that if you're assigned the gains would not be too heavy.
> 
> one approach to preventing assignments in rising stocks is to sell calls with higher strikes in the first place. These have lower premiums.


I was thinking for TECK maybe a Nov. $25 or $26, or Jan. $26. Perhaps 1 of each. The only other stock I have that I feel like selling a call on is Apple, in my RRSP. Was considering a Nov or Dec $180 or $185. Is this too aggressive you think?

I honestly have no inclination at the moment to begin "trading options". I'm aware of what the greeks are but have no time/ability to track, interpret or delve into any advanced understanding. I'm just looking at my portfolio and two of my biggest holdings, Teck and Apple, are up significantly. Instead of trimming I thought perhaps selling covered calls (and rolling them forward as needed) would be a reasonably simple way to add a bit of downside relief and modestly boost returns.


----------

