Thursday, December 15, 2011

A Look At Covered Calls - The Naked Truth

Perhaps the most promoted of all option strategies by both spruikers and brokers, is the covered call (Long the stock and short a call options in equal quantity). The most irritating aspect of this promotion is the disingenuous representation that returns of x% a month are available by systematic writing of covered calls over a base stock holding, ranging from 4% to 8% per month.

That's a lazy ~50% to ~100% per year. Nice!

But is that accurate? Barring random outliers, no it's not, but noobs get sucked in to this dream in their droves.

What I want to do is hypothetically pick three stocks from different sectors and systematically wrtite "at the money" calls on them, to see whether the 4% +  per month dream is valid.

I'm starting off with GS, FCX and NOV. I will write calls every month at the available bid and we'll even roll when jucier  extrinsic is available at other strikes when the stock has moved somewhat. I'll sell at the available offer.

As I write, GS is at 92.48 so I have written a Jan12 90 call at $6.65. This a little bit in the money providing a little more hedge along with our premium.

FCX is at 37.12 and I have written the Jan12 37 call at $2.32

NOV is at 64.46 and I have written the Jan12 65 call at $3.45

I do not personally hold these stock and this is hypothetical... a paper trade, if you will.