Jun 17 calls

[cppoly]

Jun 22, 2022 18:16:32 GMT -5 castlerockchris said:

Pretty uneventful triple witching our. Yes I meant our, cause our account kept the shares and kept the cash. Need to see the price get above 4 and then 4.5 to give people the confidence to over pay me for the 5.50, 6 and 7 calls I want to sell them. I have been rinsing and repeating on covered calls for 10 years now, sure would love to see this stock move toward the much touted $8 to 10 mark so I can start making real money off selling calls rather than making reasonable % gains that result in peanuts from a $ perspective.

Coming from someone trying to learn options, I could never understand why anyone would sell covered calls on a volatile stock like mnkd. Granted, it's been a successful strategy 95% of the time on this stock since all anticipated big news events have rarely moved the SP much. But here's the thing, like many long share holders we have all been waiting for our moment with a large run up on news.

When you sell covered calls, you collect a small premium in exchange for giving someone else the choice of taking your shares away at the strike price. Imagine news comes out that finally materializes a SP movement way north of the strike and your shares are taken away from you at the strike, wouldn't that be the worst?? I understand the appeal of collecting the premium but I would feel pretty upset if the SP hits $10 and I was forced to sell my shares at $4.

To me, I would want to sell covered calls on non volatile stocks and rinse and repeat every month to generate extra income and if the stock barely moves then that's what I wanted all along.

What's your thoughts on this?

[cretin11]

Fair question, but you answered it yourself with this statement:

“Granted, it's been a successful strategy 95% of the time on this stock since all anticipated big news events have rarely moved the SP much.”

The other part is that traders employing the strategy only sell calls on shares they are willing to lose at the strike price. Not necessarily all their shares. So they retain that upside in case that rare event occurs and share price goes way above strike price.

[sportsrancho]

The more volatile the stock is the more you get for the premium on the calls you sell. If you’re afraid of getting your shares called away go out further on your strike.
You want to keep as much upside as possible in case of a surprise.

[castlerockchris]

CPPOLY good on you for starting to learn about options.

First, A qualifier regarding my thoughts, I do not claim my options methods and strategies are appropriate for anyone but me. Everyone needs to develop their own options investment strategy or strategies and investment style. I would recommend checking out the Youtube channels of two groups in particular, Tastytrade (https://www.youtube.com/c/tastytrade1/featured) and Options Play (https://www.youtube.com/c/OptionsPlay). Both have a ton of free education videos. Be prepared to be overwhelmed by the quantity of videos, but both provide very good options education from beginner to advanced.

My particular style splits our holdings into baskets, one made up of investments, one made up of trading vehicles. Some stocks may fall into two both strategies. I rely primarily on implied volatility, Delta and Stochastic (5 day, 3 month and one year) measurements to make my decisions.

Investment bucket (80 - 85% of our total holdings)- If a stock is an investment, I will consistently sell covered calls against it. My goal is to sell calls around 45 days from expiration with a delta of 15 or less. 95% of the time I get to keep both the stock and the premium. In the event a stock is called away, a majority of the time, I have been able to buy the stock back within 30 days, at a lower price than the strike at which I lost it. I am usually able to collect 6-8% of the value of my "investment" holdings in premium every year. If I feel a stock might run up on me I will only sell calls against a portion of the shares in that particular holding (e.g. MNKD leading up to the Tyvaso DPI approval), but I must have a good reason beyond my gut.

Trading vehicles- This is made of stocks with high implied volatility and high liquidity. I have a stock screen I run and ten rules I follow with this basket. Generally I have been able to sell covered calls against these stocks that are either at the money or slightly out of the money. My goal with this group is to actually have the stock called away from me at expiration as it means I have obtained my maximum targeted return. My target return on each trade is 2 - 5%, with the holding period generally between one and three weeks, and an annualized return target (premium plus stock appreciation/loss) of 55%+, usually around 75%. Obviously, given the holding period I am not achieving that annual return on any one trade. This basket has returned roughly 48% annually in flat & up markets. In the current bear market, this basket has pulled back less than half of what the S&P 500 has pulled back. An example using MNKD- last Friday I bought MNKD at the higher end of the day for $4.04 a share and immediately sold an equal number of $4 calls with a July 15 expiration for $.30. That means in 21 days, assuming the stock is above $4 on 7/15, I will have a raw return of 6.4% or 111% annualized. If the stock is below $4, I will continue to sell either $4 strike calls or calls at a strike with a delta 30, which ever yields more, until the stock is called.

Another call strategy I deploy from time to time, tied to a specific stock, is to determine our exit strategy for the holding and sell covered calls with the correlating strike prices. In the case of MNKD you may decide you are going to sell to sell 10% of your hold when the price reaches $5.5, and 20% when it hits $7, and so on. In this case, I would sell calls with strikes correlating to the exit prices and percentage of shares to be exited. The date of the option would be determined by the premium paid. In this case you know you will be selling the stock at a set price, why not grab additional premium while you wait for the stock to hit that price?

Yes, there is risk in losing the stock, but this strategy allows me to generate income while I wait for a stock to appreciate. It also makes holding on to losers like MNKD while you wait for them to rebound much more palatable.

[sr71]

Castle - That is by far the best-articulated discussion I’ve seen on Proboards regarding Covered Calls strategy. Thanks a million (someday) for sharing 😀.