Covered calls in a "consolidating" stock market

[WendyBG]

@buynholdisdead has pointed out, correctly, that the SPX has been in a stable channel (with ups and downs but the underlying trend is flat) since last November. This is a “consolidating” market.

$SPX - S&P 500 Large Cap Index

I have read a couple of books about covered call writing. It’s the most conservative form of option trading but I still haven’t put my toe into the water. These books say that a consolidating market is the best environment for writing covered calls since most of them will expire without being exercised.

I think that a recession is approaching so I am reluctant to buy the broad market. But a conservative investor like me might buy a non-cyclical stock and write covered calls. My objective is to safely generate income without risk to principal. I don’t care about capital appreciation.

What is your opinion of this?

Wendy

[buynholdisdead]

@WendyBG

I think that a recession is approaching so I am reluctant to buy the broad market. But a conservative investor like me might buy a non-cyclical stock and write covered calls. My objective is to safely generate income without risk to principal. I don’t care about capital appreciation.

I have been doing that Wendy. I have been writing calls on Enph, DDOG, Crwd etc. Now here is the problem. You have to be careful around earnings because it can be very volatile. Also if you are doing this on dividend stocks you have to realize that around dividend distributions your stock can be taken from you just for the dividend.

So what I have been doing is writing Calls that are out about 2 weeks so that I can be more nimble. I only write them on stocks that I want to keep because if the stock does fall I could be in it for a long time in order for them to recover. Of course I can write calls on them but there is a real chance of having the stock called away. But if I really want to get some income I can buy a stock for $1.51 for instance and sell a call for $2 dollars on the very next Friday getting a nice return. (Just an illustration look at the stock you are doing the call on)

All this being say it’s all about the income. Sometimes you will have stocks drop and keep you in them longer than you want, sometimes you will have stocks take off and you would have been better holding onto the stock. Over all as long as you remember your goal, you will not worry either way. But like everything, there are risks involved.

Andy

[dlbuffy]

I have also started doing more option moves recently now that earnings season is over, and after the weird Jan/Feb rally. That term for consolidating market is new to me, but that is what I ‘felt’. LOL.

At this time, in a pretty flat market I am doing super short options. I rarely do more than a week, and at times I am getting them on Tues/Wed of that week even. This is because in a flat market I don’t want to be committed to an option for a long time. I am turning them around for .5 - 1% return on average…and that is WEEKLY, lol. (There is a process MF taught about annualizing that, but that is too much hope and wishing for me. I never expect to actually get to some annualized number.)

I see that Andy is pretty close to me on that. The longer ones are on options that only trade once a month. For those I will wait till most of the time is gone and see if prices still look good.

What I trade options on are any stocks I have enough shares in. Right now the risk of losing my long term holdings is pretty low, and with the minor volatility with every twitter storm I feel that I could buy back in the same neighborhood if I needed to.

As of this week I have covered calls on NET, TOST, and UPST. I usually have one on SHOP too, but this week is too flat for those options to have good premiums.

This is not a strategy I would use in an upward market at all. Then I’d switch to longer term options and shoot for a great time premium to make up for the risk of losing my stocks. With longer options you do risk selling the stock for a lot less than the then current price, so I do those a lot more carefully. You can roll them if you need, and you can close them if unexpected volatility come up, but you have to be ready for that.

The only PUT’s I’ve written recently were for RKLB (RocketLab) and TOST. I let a call be called on RKLB, then wrote a put to get it back, and now have a call on it. I do not expect RKLB, as a business, to grow super fast right now, and it is a stock I hold for enjoyment anyway. TOST is a good company and I wrote the put more to get extra shares that I was comfortable selling calls on.

Sorry, I got to rambling, but hope that helps a bit.

[physician]

I’ve been doing covered calls for a long time. A free site to start looking for calls is optionsdash.com - usually the highest premium calls are the riskiest. Lately some really good calls have be SFIX, GPS but CVNA has had a nice premium only to drop way below the strike price right before options expiration resulting in a loss more than once. HTH…doc

edit: I also used coveredcalls.com for many years. It has a reasonable monthly fee.

[Leap1]

My opinion…investing of any sort depends on where your focus is and how good your discipline is.

Covered calls are income producing…more often than not. But if the market goes for another bottom you are stuck for a period with some dead weight you could have used to buy at a bottom if it was cash.

Play today for some income. Play tomorrow for a much better result, if the market bottoms again.

adding no matter how bad the Dow is these days for observing the markets this is an interesting chart. You might want to also check out the setting for 2 years of the Dow chart.

The problem here is my eyeballs see a horrible rise all mangled since November. That is the sort of chart that is screaming to me the Dow will fall.

I can not call this in anyway a consolidation.

$INDU - Dow Jones Industrial Average

[dlbuffy]

Throwing out an example of the returns I mentioned above. They seem SUPER high when you are talking 1% on a week long option.

So, I have UPST from the early days. While I have been trimming it, it is also a decent option play on a stock I am not super wedded to…

I had call at - $14 for .21c and that is 1.5% in a week.
When that got called away, I turned around and did a put.
I have put at - $15.55 for .55c and that is >3% in a week.

So those are examples right now in this market with decent volatility, but no real upside for some time. I am not super in love with UPST at the moment, but it is one I have learned the fluctuations of…and if I own it, or sell it, either outcome seems ok in the long run.

All of the proceeds of these kinds of options are going into stocks I am building up, so I do not trade options on, like DUOL and TOST.

[physician]

Here’s the top calls that expire Friday. I check the price for the last year making sure there are no problems with crazy drops, I check the news and make sure there aren’t any legal woes/negative results and I make sure there are no announcements between my purchase and the expiration of the calls like earnings release. After those 3 things are looked at, I evaluate all the information. I don’t buy the stock for the value in the company other than the premium. I only want to be in the market for 3-4 days. Returns over 2% are common, but the highest returns are usually a trap and money loser in my experience. If you want 1% a week, that seems reasonable and can be done IMHO…doc

[physician]

I usually sell the first OTM call above my purchase price. Sometimes I hold the stock a day or two and the stock price will rise increasing the value of the call if I haven’t sold it yet.
An example would be to buy the CVNA stock at $9.33 (current price). The call is currently bid at 27 cents strike 9.5 that expires Friday. edit: buying a thousand shares and selling (end edit) Ten contracts (1000 shares) would get you $270 less commission and if the stock gets called out for $9.5 you make an additional 17 cents or $170 to total $400 less commission in 3-4 days. You might say why would I buy a company with the negative financial woes it is experiencing. This Zacks article would give me confidence in the trade…doc

edit 270 dollars on $9330 investment in a few days is what 2.8% return and $400 on 9330 is 4.2%. Read about covered calls and develop your own strategy, this is just how I do covered calls and I’m no expert. Maybe someone who does covered puts could put you on some pointers.