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> From: Sidney V. Gold <sgold@xxxxxxxxxxx>
>
> Given the volatility in today's market a covered call program I feel is
> an invitation to disaster for one's p&l.
Sidney, I'm not an advocate of covered calls, but I do think that
it might be worth discussing a few points that you make below:
>
> When you have a market with such large moves and gaps as we have had,
> the best option strategy is to buy calls or puts on stocks where you
> have a reasonable idea that the stock will move 3 times the premium
> paid during 3/4 of the time remaining in the option.
Although I agree that being long a call or put at least has an open
ended payoff, it is worth remembering that the market will price in
a lot of the current volatility. And picking a stock that is likely
to move 3 times the premium in 3/4 of the time remaining is a tall order.
If you think of the current options price as pricing in a 1 std. dev.
(expected) move in a stock, then a 3x move in the option price might
be close to predicting a 3 sigma move in the stock.
The "3/4 time remaining" rule of thumb probably mostly refers to options
that have 3/so months remaining time in them?
>
> I have about 33 years experience in option trading as a founding member
> of the CBOE and have also started one of the largest option desks in
> institutional stock trading and later commodity trading.
>
> To limit your upside and take most of the downward risk is not a good
> idea in today's volitile market You will wind up with limited returns
> when called and lousy returns when not,
I think Yates' claim was that selling covered calls lowered the volatility
of holing a long stock portfolio. The assumption is that the choice
of being long has already been made, so the downside is just part of
the game. It is true that upside is limited, but in a volatile market
options premiums will be higher, so perhaps the returns are still
decent.
If you have the data, it'd be interesting to try simulating a covered
call strategy, on say, HWP (Hewlett Packard) going back to 1994/so. HP
had a strong run up, and recently sold off dramatically, but snapped
back over the past couple of months. Maybe AOL or CSCO would be better
to prove your point about the effect of limiting upside. I think Yates
sold options once a quarter, at the money. Simulating the sale evey
month might be better for a sample of one stock because it will even
out some of the lumpiness in the equity stream.
The other downside of selling covered calls is that it can force you
to deliver stock, and then buy it back, which increases commission costs
and may be a taxable event (not sure on this, haven't read the fine
print lately).
--
| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
|