Saturday, April 21, 2012

A Look At Covered Calls - Cycle 4 Round Up

This is an update of my A Look at Covered Calls - The Naked Truth project. A hypothetical portfolio of systematic covered call writing (AKA synthetic naked put writing) with a non-margin account.


I have now wrapped up cycle 4 of the covered call simulation and the results get more interesting, but not unexpected on my part. The motivation for this sim is the representation of easy money available through trading covered call. Although this is not a perfect example, it is generally representative of the ebb and flow of trading this strategy.

I've tried to represent an augmented version of CC trading, via rolling at times within the cycle, to pick up more premium if possible. Most times this works, but sometimes it screws up at we shall see below with FCX.

Let's start of with GS:

The stock is off 10% (relative to starting price in Dec 2011) and the cycle's movement is shown by the red box.

I was able to roll the calls dow, collect most of the original premium, plus the additional premium as it expired OTM. A 6.4% cash profit from the option premium. This is set against the 10% fall. Although the covered call outperformed buy an hold in this cycle, the covered calls still made an overall loss. Buy and hold over the four cycles is still outperforming covered calls at this stage.

FCX was the screw up for the month from a trading perspective. The stock is down just ~2.5% for the cycle:

This is CC manna; write calls get sideways movement collect the premium and buy a holiday to the Bahamas on the proceeds at the end of the cycle. But when this whipped down to around $36, I traded the April $40 calls for $36 calls (Which I neglected to record on the blog. Like GS above, it would have worked well if it lingered down there, but it didn't. It whipped back up again causing a loss when closing out ITM on the second lot of short calls.

C'est la vie.

Cash profit for the cycle 0.65%, less the loss on the stock and we are again behind a bit. Nevertheless, the covered call strategy is in front of the stock over the four months by an eyelash.

Lastly, NOV was down ~9% over the cycle:

I rolled this twice and closed the third lot as it was slightly ITM, getting nice chunks of premium from each resulting in ~5.6% cash profit. But like GS, the dumpage of the stock caused an overall loss for the cycle. Like GS, the covered calls are making gains on buy and hold, but after four months, buy and hold is still a few lengths in front.

The overriding point at this stage is that in a non-margined account, there is still no net cash income from the covered calls. That would be disconcerting for someone sold the dream of reliable cash income from covered call trading.


  1. Really appreciate you putting this together - what techniques are you using for selecting your stock? This looks similar to ideas I learned recently, but they were also buying puts for a maximum 10% loss. What do you think of this strategy? The puts were valued at around 30% of the covered call premium, and mixed with diversification, resulting in generally positive outcomes.

  2. Thank you for sharing the informative post. Investing in covered calls requires you to have thorough knowledge about the present market and its moving trends. Or you may hire a specialist for his expert opinion to select a portfolio for covered call returns.

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