Headlines! We have Headlines!

[Goofyhoofy]

So for those who don’t regularly open the Wall Street Journal, I thought I would replay the front page for today, April 22:

Dow Headed for Worst April Since 1932 as Investors Send ‘No Confidence’ Signal

https://www.wsj.com/finance/investing/dow-jones-stocks-worst-april-1932-74fe82ac?mod=hp_lead_pos1

And the next story:

Trump Is Laying the Groundwork to Blame Powell for Any Downturn

https://www.wsj.com/economy/central-banking/donald-trump-fed-jerome-powell-blame-b6d4189f?mod=hp_lead_pos2

And then there’s

Harvard Is Suing the Trump Administration

https://www.wsj.com/us-news/education/harvard-sues-trump-administration-lawsuit-0f00e894?mod=hp_lead_pos5

I’ll skip the story about the Pope’s funeral plans, and maybe even the one that talks about the second Hedgseth Signal conversation with his friends & family about classified military matters. So we can get to:

From Fake Eyelashes to Care Bears, U.S.-Bound Goods Are Stuck in Tariff Limbo

https://www.wsj.com/economy/trade/from-fake-eyelashes-to-care-bears-u-s-bound-goods-are-stuck-in-tariff-limbo-a4bc0f44?mod=hp_lead_pos10

This Bridge Promised to boost US Canada Trade — Then Tariffs Arrived

https://www.wsj.com/video/series/breaking-ground/this-bridge-promised-to-boost-us-canada-trade-then-tariffs-arrived/E93624BA-522D-4060-B918-6FA6F24597C2?mod=hp_lista_pos1

Dealmakers Are Struggling to Make Sense of Trump’s Antitrust Policy

https://www.wsj.com/business/deals/dealmakers-are-struggling-to-make-sense-of-trumps-antitrust-policy-2d9bf77c?mod=hp_lead_pos6

Looks like the center of attention is right where he wants to be - not necessarily in a good way, but the WSJ seems rather focused on those “new and exciting” policies we’re hearing so much about.

[Note: this is how the stories laid out in the app. The appearance in the pulp version may be different.]

[captainccs]

How to use these headlines to improve selling covered calls?

The Captain?

[DrBob2]

@captainccs

How to use these headlines to improve selling covered calls?

To start to answer that we need to know what makes for a good covered call candidate.

DB2

[WendyBG]

@captainccs

How to use these headlines to improve selling covered calls?

@captainccs in a book I read about covered calls it said that the best environment for covered calls is one with lots of volatility but a stable (unchanging) underlying trend. If the trend is up you are better off holding the stock for growth. If the trend is down the covered calls will not yield much.

The current stock market is extremely volatile with an underlying negative trend. We are seeing the indexes move 2% in both directions in the course of a week.

There must be some stocks that participate in these wild fluctuations but the underlying trend is stable (not declining). Your software would probably be able to find them, right?

Actually, I would like to write covered calls but I don’t really understand how to do this. I also don’t know how to find stocks that would be best. I’m staying away from the indexes because I think they will have major falls in the near future.

Wendy

[Hawkwin]

@WendyBG

I also don’t know how to find stocks that would be best.

Don’t let best be the enemy of good enough. You can sell deep out of the money calls on positions you don’t intend to sell and the worst that will happen is you will bank a massive gain you didn’t expect.

As I detailed in a post last year, I purchased TSLA at around 160+ and sold covered calls that expired 60 days later at a price of 215 and 220. For that, I was paid a premium that worked out to about 2% (or 12% annualized). TSLA exploded in price shortly after than and my calls were exercised for a nice gain of roughly 30% in two months. I never expect those calls to trigger but who am I to argue with a 30% gain in two months. Of course, the stock went much higher and I could have gained more - but that assumes I would have sold at the right time which is of course never guaranteed.

The worst that can happen if you add covered calls to your existing strategy is making less than the best possible outcome (a result that most people miss anyway).

[captainccs]

@DrBob2

To start to answer that we need to know what makes for a good covered call candidate.

Wendy gave a good overview. High volatility and a steady upward trend.

@WendyBG

There must be some stocks that participate in these wild fluctuations but the underlying trend is stable (not declining). Your software would probably be able to find them, right?

No. The software cannot predict the future. Expert traders tend to be good short term forecasters. I studied their methods and convinced myself that I’m not a good trader. To maximize income I rely on high tech stocks which tend to be volatile and hopefully long term growers. But in market downdrafts the capital losses can be overpowering. One needs staying power to weather the storms.

@WendyBG

Actually, I would like to write covered calls but I don’t really understand how to do this.

A good way to start is to use your stocks well out of the money so they don’t get called. If called, you should get large capital gains. @Hawkwin gets it!

@Hawkwin

Don’t let best be the enemy of good enough. You can sell deep out of the money calls on positions you don’t intend to sell and the worst that will happen is you will bank a massive gain you didn’t expect.

The Captain

[MarkR]

@Hawkwin

The worst that can happen if you add covered calls to your existing strategy is making less than the best possible outcome (a result that most people miss anyway).

Oh, a lot worse can happen! Let’s say you bought Tesla at $300 in February and sold $350 calls a couple of months out at $25. Then Tesla dropped from $300 to $240 (right now). The option is just under $1 now, so pretty close to worthless. So your total cashflows are:
Shares at $300 = $30,000 out
Option at $25 = $2,500 in
So a net investment of $27,500 in Feb.
Shares today at $240 = $24,000
Option today at $1 = -$100
Total value today = $23,900

That’s a loss on paper of $6,100. And the option is going to expire in 3 weeks from Friday. You could, if you want, buy [back] the May option for $1 now, and sell a July $270 for $20. Then in July, if the stock has risen to $270 or thereabouts, you will probably be assigned, and sell for a net of $270 + the $20 you received for the new option.

Then your net is -30000+2500-100+2000+27000 for a net gain of $1400. Not a terrible gain, but still only middling considering it took two rounds of option selling and 5 months or so. And that’s only if the numbers work out in your favor!

Of course, if the stock doesn’t reach $270 by then, those options will expire worthless and you can do it again. Repeat until the option is assigned and the shares sold.

But, you always have to run the scenario of the stock tanking and staying low for a while. What if Tesla drops to $150 and stays there for a year. Will you still be willing to sell call options at lower and lower levels every month or two? Or will you be unwilling to perhaps be assigned at $150 or $170 for a stock that you originally purchased at $300?

So, covered calls, while they can earn you money, still have substantial risk of loss. And this is the risk that @WendyBG always says she is trying to avoid.

[captainccs]

@MarkR

Oh, a lot worse can happen!

That “lot worse” was not caused by selling covered calls. In fact the covered calls mitigate the loss.

The one problem is that while the stock is falling you cannot sell it, first you have to buyback the calls. The stock falls faster than the calls (delta).

The Captain

[Hawkwin]

@MarkR

Oh, a lot worse can happen! Let’s say you bought Tesla at $300 in February and sold $350 calls a couple of months out at $25. Then Tesla dropped from $300 to $240 (right now). The option is just under $1 now, so pretty close to worthless. So your total cashflows are:

I will quote myself again because details matter:

@Hawkwin

if you add covered calls to your existing strategy

Existing strategy. I did not state you can’t suffer losses but your losses will be no worse than if you did not add covered calls at all.

The stock tanking doesn’t change the calculus (and of course, you make a little income even if the stock is tanking - as you illustrate).

[WendyBG]

@MarkR

So, covered calls, while they can earn you money, still have substantial risk of loss. And this is the risk that @WendyBG always says she is trying to avoid.

@MarkR thank you for your detailed explanation.

From this, I understand that the most appropriate stock for me would be a sleepy cash cow – a dividend-yielding stock with a wide moat and a history of fluctuating around a median price but basically going nowhere. No chance of big gains but little chance of big losses.

This is because I like consistent income but I’m not really interested in growth that comes with risk. Of course, that’s a personal preference.

Would you’all agree?
Wendy

[intercst]

Yep. I rather be the guy collecting the “skim” for writing a “covered call” than the investor holding the risk of loss.

intercst

[Hawkwin]

@WendyBG

Would you’all agree?

Yes, there was another recent post about stocks that have very low volatility. Those would work but keep in mind that the less volatile the stock is, the less premium you will get for the covered call. The counter-party isn’t going to bet that the stock is going to break out if it doesn’t have a history of doing so - or a recent forecast that suggests otherwise.

[rainphakir]

@WendyBG

Actually, I would like to write covered calls but I don’t really understand how to do this.

Please allow me to explain what I do.

LTBH is ‘wealth building and maintaining’. Options investing, for me, serves a different goal.

I view the options that I’m doing as INCOME generators … similar to the ‘income from interest on Bonds, TIPS, Treasuries’.
It differs in that the underlying PROTECTS the original investment - ie Return OF investment.

or INCOME from Dividend paying stocks.
The underlying stock price can fluctuate - same as can the underlying for an Option.
Using Options is more Return ON Investment.

Here’s an Option that I just did on RGTI.

Rigetti Computing is a QUANTUM COMPUTING stock. High Risk.
Low stock price (ie under 10$), and I am WILLING to OWN it.

I bought 100 shares at $8.52/share; or $852 total dollars. 100 shares is one contract worth of shares, so that I can sell CC (Covered Call) Options on those shares.

I immediately sold an ATM (At The Money) Covered Call on those shares.
The current market price when I sold these Options was $8.53/share.
Expiry: 25 April about 3DTE. ie 3 Days to Expiry.
Strike: $8.5/share; … times 100/contract.
Premium: $0.30/share; … (times 100/contract = $30/contract.)

so, Look at that. I PAID 8.52/share and made an OBLIGATION to SELL at 8.5. That appears to be a LOSS of 0.02/share - yes?

BUT… let’s look at the PREMIUM… 0.30/share.

IF the shares get called at 8.50, I will lose 0.02/share… but, I’ve ALREADY BEEN PAID 0.30/share, in Premium.
In essence, I would be getting 8.50 + 0.30 = 8.80/share.
I paid 8.52.
8.80 - 8.52 = 0.28/share GAIN.

I ‘want’ to get at least 1%/week gain on my investment.

My investment is 8.50 (the STRIKE at which I’ll have to ‘sell’ my stock).

1% of 8.50 (the investment/share) is 0.0850/share.
The Premium is 0.30/share.

0.085 / 0.3 = 0.28333 or 2.83%. I’m getting more than my 1% minimum requirement.

For each contract, I get $30 premium. Commissions take about 0.66/contract. So, I actually got $29.35 or so in cash.

A stock is bought or sold AT A MOMENT IN TIME - a SNAPSHOT, if you will.
An OPTION - with all the ‘stuff’ that goes into the Black Scholles equation that calculates the premium… is a SNAPSHOT of the stock AT THAT MOMENT… cause the current market price of the stock will change within seconds or minutes. And then a ‘different SNAPSHOT’ will exist.
If nothing else, THETA will change (decay). And the ‘new’ Black Scholles calculation will produce a different ‘Premium’.

ATM Options are a Delta of about 50/50. Ie it’s a toss-up if the current market price at Expiration will be the ‘Strike’.

There is a concept that helps:
Intrinsic value. The ITM (In The Money) value, ie the amount the Option can be sold for. In this case, RGTI is 8.53/share. The stock SELLS for 8.53. I ‘promised’ to sell for 8.50. Therefore, the Option is 0.03 ITM. it’s INTRINSIC value is 0.03.

Extrinsic value. Is the ‘value of the premium’ that is not part of the Intrinsic value. I collected 0.30… 0.30 - 0.03 is 0.27.
0.27 is the EXTRINSIC value. This is ‘mostly’ THETA.

NOTE: I’ve described this (mostly) from a single share POV.
The Options contract is for 100 shares.

Per CONTRACT, I got $29.33 or so.
I actually bought 1000 shares (10 contracts worth) of RGTI, and sold 10 CC contracts. So, for this Options trade, I collected 293.35 in premium.

Scaling options is easy.

But, I recommend only doing 1 or 2 contracts… until the user gets experience: buying, selling, MANAGING… the trade.

Depending on where the current market price is at Expiry, I will ‘manage’ it and likely ‘roll’ it. Cause, I ‘like’ to roll em.

HTH.

ralph

[GDavenport]

Ooh… goody goody. For the down market we’re in, do one for selling puts!
Example:

APP (from Saul’s board) current price is $239.20 (Tuesday AMC)
04/25 240P is ~$10.5

… you need $24,000 in cash behind the trade.

Net proceeds are $1050 - (Options premium per contract) and the carry is 3 days.

If the bottom falls out of the market in the next two days, you have a break even price at $230 at assignment, but you miss any breakout to the upside when you should have OWNED the shares.

If you don’t want to own the stock, or if the stock takes a big dump on the following market day, you may have a loss.

If you want to own the shares, this is not an issue.

Now, the market is closed. I’m pretty sure fair value on the option with 2DTE is more like $15 due to flexibility. I would not accept $10.50 for this set up.

EDIT: in the span of time it took to write the above, the stock has moved up an ADDITIONAL $5 a share, making the numbers even less attractive. A new set up must be reviewed after-market open tomorrow morning.

[MarkR]

@captainccs

That “lot worse” was not caused by selling covered calls. In fact the covered calls mitigate the loss.

In this particular case, the people saying they want to begin “doing covered calls”, they mean BOTH the purchase of the stock AND the sale of the call option. That’s why they are asking how to find which stocks to do these trades with.

Selling covered calls on stock you already own (and presumably like) is a different type of trade. You either earn some income from your shares, or you sell them at an attractive price to you (as you decided when choosing the strike price). It’s very similar to what I do when I sell puts on stocks that I want to accumulate at a given price. Either I earn a little income from that stock position, or I buy shares at an attractive price to me (as I decided when choosing the strike price). Heck, just last weekend, I had two of my put positions exercised and now I am the proud owner of some more of those shares.

@WendyBG

From this, I understand that the most appropriate stock for me would be a sleepy cash cow – a dividend-yielding stock with a wide moat and a history of fluctuating around a median price but basically going nowhere. No chance of big gains but little chance of big losses.

In general, you have to be careful selling calls on dividend stocks. If the price of the stock rises above the strike price, but there is still time until the option expires, it is possible that the holder of that call you sold will attempt to “swipe” the dividend from you by exercising just before the ex-div date. You can read a lot more about it here.

This has actually happened to me a few times in the past with the upper call option of a bull call spread (BCS). It is VERY annoying when it happens (because it “breaks” the BCS). Happened to me in 2014 on an Apple BCS, I had an Jan '15 400/500 BCS (became 57.14/71.43 after a split). The short 500 call was exercised and assigned to me. When exercised, I had to deliver a large number of shares, but I didn’t want to sell the low basis shares I owned, so I had to buy them on the open market and deliver them, AND a few days later on 8/17/14 I, yes I, had to pay the dividend ($0.47 at the time) as well on those shares. Of course, on the next ex-dividend day (11/5/2014), I did the exact same thing to the holder of the long 57.14 strike (was previously 400 strike) options I held. I exercised them, got to buy shares for $57.14, AND whoever was assigned that exercise had to pay me the dividend of $0.47 on 11/13/2014.

@intercst

Yep. I rather be the guy collecting the “skim” for writing a “covered call” than the investor holding the risk of loss.

Yes, once I realized that the sellers of options are, on average, more sophisticated than the buyers of options, I chose to almost entirely sell options rather than buy them. Back in the 80s, I only bought options thinking that selling was “too scary” (plus you needed a higher level of trading permission to sell them). Nowadays I sell options nearly every month, usually as a way to increase my position in stocks that I already hold and like … but at slightly lower prices than prevailing.

I also like trades with fewer decisions. When I sell put options each month, there is only one decision that I have to think about … when to sell them and at what strike price. After that, I will almost always ignore them. Very rarely, something will move me to buy them back, and even more rarely to buy them back and sell a different strike. But the vast majority of the time, in the end, they either expire worthless and I keep the premium that I was paid, or they get exercised and assigned to me and I get to buy more shares at a price that I like (remember, I chose the strike price).

[MarkR]

@GDavenport

If you don’t want to own the stock, or if the stock takes a big dump on the following market day, you may have a loss.

For example if you did the above RGTI trade on Jan 7, 2025 with a 3DTE, you would have had a substantial loss. There’s a reason those 3DTE options have such a high price … because the underlying stock is quite volatile!

[mostlylong]

@MarkR

I realized that the sellers of options are, on average, more sophisticated than the buyers of options

Seriously?

I would put this in the storytelling category.

[captainccs]

@MarkR

In this particular case, the people saying they want to begin “doing covered calls”, they mean BOTH the purchase of the stock AND the sale of the call option. That’s why they are asking how to find which stocks to do these trades with.

Both @Hawkwin and I suggested starting with stocks they already own. I wrote:

A good way to start is to use your stocks well out of the money so they don’t get called. If called, you should get large capital gains. @Hawkwin gets it!

The Captain

[MarkR]

The problem with using low volatility stocks and using a high strike price is that you get such a tiny yield that it’s almost not worth doing in the first place. I did a search for “low volatility stocks” and Microsoft is the first one, so let’s use that as an example. I personally would define “well out of the money so they don’t get called” as about 5% above the recent high. If you have a different definition of it, let’s discuss!

Let’s say MSFT has been part of your portfolio for a while now. So MSFT is now 375, the recent high was about 445 earlier this year. So a safe level to sell covered calls (and reasonably expect to not get exercised) is 445 + 5%, or about 465. Let’s look at calls around that level. And let’s say we go 3 months out (so you can potentially do the trade 4 times a year). The July 465 is trading at 0.73/0.80 right now, so maybe you could get 0.77 or 0.78 if you are patient. Now do that 4 times a year, and you get a little over $3 “yield” for the year. That’s less than 1%! Is it even worth it?

Now the RGTI example above, because it is much more volatile has MUCH more expensive options. RGTI is just under $9 right now. But the $15 (recent high is 13.80, add 5% get 14-something) July call is 0.51/0.55, you could very likely get $0.52 right now. Do that 4 times a year and you got $2. And $2 on a $9 stock is a 22% yield. Volatility is what causes that.

[captainccs]

@MarkR

The problem with using low volatility stocks and using a high strike price is that you get such a tiny yield that it’s almost not worth doing in the first place.

I went through your example. You chose a very high strike price and a fairy long expiration date both of which favor your bias.

MSFT has 1522 calls to chose from. Picking just one is not likely to give you the best choice. I ran MSFT through my Call Selector, these 12 calls are your best choices:

If I had to pick from this list I would pick

May 16, strike $410 the premium is 0.6233% of the current price, annualized is 9.9%. If the call is assigned your get a total CAGR of 313% In a bear market it would be an OK risk. In a bull market, not so much.

The Captain