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I would like you to speak to the concept of rolling up, rolling down or ...
Suggestion by FundTechInvestor on 2009-02-18 00:05:19
I would like you to speak to the concept of rolling up, rolling down or even rolling out of a position. Any ideas on evaluating when to do what, and which positions should, could be rolled? Any reference to a calculator would be helpful regarding rolling as well.
Add comments or discussion related to this suggestion here.
Covered Calls
Created by Jeff Williamsen, should be integrated if possible.
It is not my intent to educate my blog readers on Covered Calls, alternately referred to as Buy/Writes. Believe me, just Google Covered Calls and you will find plenty of information on the definition of this trade methodology. What I want to do in this blog is discuss my journey and how it got me to this point, my education and my historical results using this methodology to create income for myself and my family. Hopefully you will be encourage by this reduced risk trading and be as successful as I have been.
So, how did it all start?
I have been an active trader now for over 10 years. My original interest was spurred by the beginning of the dot com bubble in 1997 and the growth of on-line trading. At first I dabbled in stocks of internet companies, and quite frankly made a lot of money. I mean, you couldn’t go wrong back in those days. I was young then (well, right now 49 sounds pretty young) and I could put more money at risk.
I retired early (1999) and went on the road as an IT consultant and also did pretty well from an income perspective. I was able to slip in a few trades during the day, but I did most of my research and trade selections at night. I have always been what is called a swing trader (trade the peaks and valleys) and never a buy and hold investor – I just don’t have the patience.
Around 2003 I started to research options. I did a bunch of paper trades and then jumped into live trades later that year – just buying Calls and Puts. My favorites were Apple, RIMM, Google, etc. For the most part I was successful, but I was also very nervous if I could not monitor these trades during the day. I was trading slightly OTM options with 4-8 month expirations.
At the start of 2006 I was laid off. While I was actively looking for work, I also had a lot of time to spend looking at other trading strategies. I signed up for a Forex trading course that cost a lot of money and tried that for a while. Talk about high pressure! While I didn’t lose much, I couldn’t stand to see trades go from +$400 to -$400 in seconds. I tried other option strategies – Iron Condors, Calendar Spreads, Butterflies, etc., but the one strategy that I consistently made money on was Covered Calls.
During the first few months of 2007 I was considering starting up my own Covered Call service, so I did some research looking at the potential competition. I signed up for a few services, but quickly canceled them during the trial period. Then I found John Brasher’s Call Writer web site. I signed up for his service and soon found out that I could not compete with the sophistication of his ‘real time’ Covered Call and Naked Put tables and research tools. So, I will shamelessly promote this service in my posts. If you should decide to subscribe to his service, use this link to get special introductory pricing.
If you have done any research on Covered Calls, you will see many articles that imply this is a bad trading strategy. The main reason in their argument is the limit on gains for stocks that are on a bull run. While this may be true for a buy-and-hold investor, it does not ring true for a trader looking to hedge risk while maintaining steady gains. You can tell the source of these opinions originate from web sites of traditional thinking investment firms. I don’t mean to degrade or slam that methodology; it’s just not my style.
The way that I trade this strategy is to 1) not be married to the underlying (with some rare exceptions) and be willing to be exercised on, adjusting or closing the position when necessary and 2) never write a covered call longer than the current month or the next month.
So here are my reasons:
1) Consistent Income. My personal experience is an average of 1-5% a month. I love seeing the cash deposited in my account when my trade is executed. Sometimes, over the course of 2-3 weeks, enough cash is credited to my account to allow me to take on another position – never more than 10% of my account.
2) Reduced Stress. I don’t have to be in front of the market all day, nor do I have to worry about margin because the short calls are ‘covered’.
3) Excitement. Expiration week is my favorite time, and Thursday and Friday of that week are like a party to me.
4) Qualified Plans. This means an IRA or Roth. My account is an IRA and I don’t have to report anything to Uncle Sam, and I don’t have to worry about Wash Sales.
5) Low Startup. If you have $10,000 (the minimum in my view), you can open an account and start writing Covered Calls. Anything less than that and you would not be able to be diversified.
6) Simple. If you have a grasp of what an option is, the concept of a Covered Call is simple, unlike other option strategies. It’s also easy to figure out what happens at expiration if you are ITM, ATM or OTM.
In future posts to this blog, I plan to cover the Call Writer service, how I use it to generate income, cover some good and some bad trades, my actual performance, how and why you would adjust trades (closing, expiration or rolling), what actually happens at expiration and documenting trades and earnings.
My blog address is: http://buywrite.wordpress.com
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