Comments on: A Simple Yet Profitable Call Option Strategy

By: hloerwgh

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By: DR

DR — Mon, 18 Jan 2010 13:57:42 +0000

Hulk, thanks for the information. There’s no question that like all investing, call options have risks. One thing I wanted to note, however, is that I’m not suggesting buying naked calls. Perhaps I should have made that more clear, but this strategy assumes that the investor owns 100 shares of whatever company they are selling call options on.

For those wondering what a naked call is, it’s simply selling a call option when you don’t own the underlying stock. Would never recommend it.

By: Hulk

Hulk — Sun, 17 Jan 2010 23:16:35 +0000

I’ve done this on and off for awhile, and I’d like to give a couple of additional caveats.

- There’s no sure thing. Even if you’re playing it “safe” as in Evan’s strategy, one big hit will wipe out all of those slow but steady gains and then some.

In your example of the $42 strike price on a $40 stock, remember that the downside that you mentioned (the stock goes up to $50) means that you’ve lost $650 (you would have to buy back the calls at $800 before expiration), which wipes of four rounds of the safe $150 gains.

And unlike buying calls or stocks, you’re “naked” with your investment, meaning you can lose a lot more than your initial investment. If you sell your $1.50 calls on that $42 stock and the next day they announce that they’re being bought out at $70/share, you’re out $2800.

- Every company does it differently, but the reserve requirement in your account is usually based on the value of the underlying security. So, in order to sell just one of those calls for $150, the broker will protect their own ass(ets) by requiring you to have a some percentage of the value of the underlying value of the securities covered in the form of cash/stocks in your account that could be liquidated if need be. Not that big of a deal, but it may tie up some money that you would like to have working for you somewhere else.

It’s a strategy that can work for you, but don’t be lulled into thinking that it’s a simple, low-risk strategy. Tread carefully.

By: DR

DR — Fri, 15 Jan 2010 10:44:16 +0000

Evan, nice point on the risk of the stock dropping. Since I only buy long, and call option contracts are short in duration, this risk isn’t a big concern for me. But it is certainly something to consider.

By: Evan

Evan — Wed, 13 Jan 2010 01:41:42 +0000

DR,

I LOVE selling covered calls. You don’t have go that deep to start out. For instance I bought FRE (Freddie Mac) and keep selling covered calls about 50 cents away from the price of the stock (closed today at 1.38) for .15 – getting me $15 – with an expiration of 30 to 45 days away. While this isn’t a lot I keep doing it over and over with a bunch of different stocks.

There is a whole lot more into it that I don’t fully understand with Deltas and stuff. Tradeking (who I use) has TONS of great stuff for newbies.

The other risk that you missed was that the stock drops substantially – since you are in mid-contract you won’t be able to sell the underlying stock.