Covered Call Trading: Strategies for Enhanced Investing Profits by Place Steven

Author:Place, Steven [Place, Steven]
Language: eng
Format: epub, mobi
Published: 2013-11-25T00:00:00+00:00

THE MAJOR TRADEOFFS

With a clear understanding of the risks (Greeks) involved, you should have a good picture as to that the tradeoffs are in covered calls. Let's take a look at some of the main considerations.

Premium vs. Risk

If a stock option has a higher amount of premium, then you can get larger returns from selling that option.

The problem is... option premium is "rich" for a reason. It may have earnings coming up or may be a takeover target.

Conversely, the boring, low-risk stocks will have option boards that are low-priced. These will be more "certain" plays, but the market often prices that risk (or lack thereof) accordingly.

In other words, you get what you pay for.

There will, of course, be times in which an options market will over or underprice the stock's volatility. As you develop volatility analysis techniques, you can use those to help get an edge in your covered call trading.

Theta vs. Gamma

If there is one tradeoff you will never get away from, it's the tradeoff between theta and gamma. If a call sale offers you a massive amount of theta (time premium gains), it will always be tied with massive gamma risk.

This is especially true when dealing with weekly options. Due to the exponential decay function related to theta, the bulk of your theta gains will come through in the last few weeks of an options lifecycle.

But that also means you are exposed to a higher position variance. This is a function of how your delta changes over time (also known as charm). At expiration, the delta of a covered call is either 0 or 100. That means if a trade starts going against you right at expiration, it will go against you really hard.

It's what I call the gamma knife edge. And I've been cut on it plenty of times.

The tradeoff is-- if you select a call option that is too far out in time, it will take forever to realize any sort of theta gains. The benefit would be that you aren't stuck on the gamma knife edge

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.