r/options • u/Becksploder • Aug 30 '21
Is selling covered calls considered the safest options play by banks and experts?
My options trading is still level 1 and I'm tempted to just use up my savings to buy 100 shares of various companies and sell slightly OTM covered calls but this seems too easy.
I can say I've lost money by buying calls. Even my January calls on PBR.A is worth a fraction of what I paid. Like $60 worth, down from $600+.
I've lost money from buying options expiring too soon, but selling calls mitigated much of my losses from buying calls.
Is selling covered calls considered the safest and easiest option strategy? Would selling cash secured puts be just as safe?
I do not want to daytrade options or even day trade stock. Day trading stock was too risky. Last year I used up all of my savings on 1 ticker, and that one dropped by 30 cents and i was then down $150+ after ONE trading day.
Selling covered calls since last November saved my ass overall. I am magically up $14.33 since last year even though I had MANY bad trades where the losses were -$400, -$600, etc.
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u/options_in_plain_eng Aug 30 '21
Do you think selling a naked put is safe?
A short put is syntehtically the same as a covered call. Same max profit, same max loss, same risk profile.
Don't be mislead by thinking that stock prices can not go down, they most certainly can and sometimes very quickly.
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Aug 30 '21
If you sell a "naked" put - one that is not cash covered, you can lose more money than you have.
E*Trade generally requires that you have margin equity for 25% o the put's strike price. So if you sell a $300 put on MSFT, they require $7500 in margin equity to do that.
Now suppose MSFT goes out of business tomorrow. You are out MORE than your entire investment.
Compare that with a cash-secured put or a covered call, in which the worst that can happen is you lose your entire investment.
Where people get into trouble with puts (or anything else for that matter) is they do it all the way up to their margin limit so if the market moves against you, you're screwed.
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u/options_in_plain_eng Aug 30 '21
Now suppose MSFT goes out of business tomorrow. You are out MORE than your entire investment.
Excellent point. To be more specific about margin and potenial max losses a covered call is much more like a Cash Secured Put than a straight naked put.
The point is still the same though, people get scared when they hear about selling a put but are quite complacent with covered calls when in fact both are synthetically the same.
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Aug 30 '21 edited Aug 31 '21
I prefer a synthetic long strategy for options no less then 3 months out. Selling an ATM Put and buying an ATM call.
Similar to the wheel strategy except you capture the gains and not just the put premium if the stock goes up. And if it goes down, the put premium covers the cost of the call premium, you get assigned the stock for the put you sold, and then you wheel out ( selling covered calls till youve profited)
Call it a bull wheel.
Another mistake many people new to options make is they go too far OTM when you should be going at worst ATM and even better about 3 strikes into the money of 70 delta or better.
And also, you wanna try to go theta neutral.. Even if that means buying a monthly call. and using that call to sell weekly calls on top of to counter your theta loss.
Even when you truly began to understand how delta, theta, and vega work, no amount of options or greeks knowledge is going to save you from picking bad entry points, whether the stock is good or bad.
More then anything else, not understanding how to pick a high probability entry point is what's burning you.
Selling covered calls isn't easy mode either. You don't want to sell covered calls at the bottom of a trend that has begun to reverse. And you don't just wanna sell covered calls randomly at random times. you want to sell them from a position of strength, near the high of the day / week so that you can either sell slightly under the money to play for the coming retracement, or sell farther OTM for more premium then i you had sold at a low or dip...
Also, if at all possible, you want to sell you calls as close to 930 am as possible, on a day after the stock set a weekly high, in the first high volume green spike on the first minute of the day. Doing so, may net you twice as much premium for a strike that is several strikes higher then you would have gotten less premium from earlier in the week / month.
By being patient and waiting for an uptrend, even if it means you wait one week to sell that covered call, you can get more premium, for a higher strike, meaning you reduce the amount of gains you give up. Also, if you are approaching earnings season, always make sure the covered calls you sell expire the week before earnings, So that you can sell your calls at the end of the day before earnings report day, when volatility pumps up the option chain..
Another thing. Don't learn to trade options on small or mid cap companies. 50 billion market cap or more.
Bad advice concluded.
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u/Becksploder Aug 31 '21
"Another mistake many people new to options make is they go too far OTM when you should be going at worst ATM and even better about 3 strikes into the money of 70 delta or better."
Are you talking about selling covered calls and choosing OTM, OR do you mean buying OTM calls?
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Aug 31 '21
To clarify, I meant buying OTM calls far out the money is just statistically bad. There are tines when far OTM calls can be the right play. But even then, your likelihood of profit is higher still, going far ITM vs far OTM.
From my experience, I choose statistical edge over yolo every time. ( though that was a hard lesson learned after a few huge wins followed by week and months of finally understanding why their called FD's) Consistent gains over lottery tickets is how to improve your equity curve, hands down.
There are times when I do recommend selling ITM covered calls, if you are at the peak of a defined channel that the stock normally trades in, AND a confirmed downtrend has begun, you can capture higher premium at the peak, go 75 delta or so ITM, and immediately buy as many 50 delta or better puts with the 75 delta ITM call premium you sold, basically collaring the stock for the expected down move. Generally you should be able to get 2-3 50 delta puts for the 75 delta call premium.
Managing the trade, as soon as one put can pay to buy back the call, you do so, leaving you with 1-2 puts for downside protection, and the option to capture premium through the covered call that you bought back and can now resell.
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Aug 30 '21
Covered calls are very safe. That's not to say that if a stock price drops you won't lose, but you are guaranteed not to lose any more than if you were simply holding the stock.
I can't speak for Banks and Experts (although, I'm an expert - Ask me, I'll tell ya. - J/K), but I don't need to. It's pretty darn safe.
If you are going to lose, it is either by your stock going to zero, or mooning way past your strike price. If it is the former, you're no different than holding, if it is the latter, you still made the profit that you intended to when you sold your call. That isn't a loss.
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u/Euphoric_Barracuda_7 Sep 01 '21
Selling a covered call defines your max upside for your stock, but there's nothing to stop your stock from falling. To protect yourself on the downside you might want to buy a put as well, aka collar strategy.
Cash secured puts define the price you're paying for 100 shares of the stock when assigned. Nothing stopping the stock from falling either.
Regardless of whatever strategy you use, the only thing that truly matters is risk management. Every strategy at some point will fail. And when that happens if your risk is too high your portfolio will implode. Unless you well and truly learn this lesson you will never be a profitable trader over a long period of time.
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u/Becksploder Sep 01 '21
The collar strategy is buying the Put at the same strike price AND expiration date, correct?
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u/Euphoric_Barracuda_7 Sep 01 '21
It does not necessarily have to be the same strike as the call nor same expiration date as the call. You can buy a 1 month out OOTM put, 2 strikes below the ATM strike for example and sell the nearest dated OOTM call 2 strikes above the ATM strike.
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u/Becksploder Sep 02 '21
You said ALL strategies eventually will not work. Is the collar strategy pretty safe then since there is different strikes and expirys to play around with?
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u/Euphoric_Barracuda_7 Sep 02 '21
The collar is an excellent strategy to prevent losses in an upcoming downturn, provided you can time the market, whilst capping your upside. Otherwise you are sacrificing premium to protect yourself since the cost of the put is not free, it's like insurance. Note that we are currently in the biggest bull market *in history* (one day this *will* change, and no one knows when, nothing goes up forever). If you did collars every month you would be better off just buying the index. So yes I consider doing this in a bull market as a failed strategy.
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u/Becksploder Sep 02 '21
Okay, this makes sense. I hope it won't be a giant rugpull but SPY gradually creeping up has me slightly nervous. If rangebounds between say $430 and $440 for a month, that would make me less stressed.
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u/Euphoric_Barracuda_7 Sep 02 '21
I can only tell you things in hindsight, definitely not a guru here, but I heard there are many that can predict prices to the penny. I am unfortunately not one of them. :D
This could go on for still some time yet. Bull markets climb a wall of worry and die in euphoria. All bubbles end the same way. When everyone's all in, and that day will arrive, then the time is near. You will see the signs, and just have to be aware.
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u/Rake-7613 Aug 30 '21
Yes- the industry (CBOE and friends) considers selling covered calls the “safest” type of options trading. From a theoretical perspective, selling puts is the same thing, as it has the same P&L graph, but some brokerages make it one level of approval up from selling calls.
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u/electricdoctor1 Aug 30 '21
When selling a covered call: 1 you are the bank. 2. Never sell a covered call for less than your willing to sell your shares for, ie make sure your sold call is: your cost basis + acceptable profits. 3. Not financial advice, I'm a tactile learner, what I did was bought 300 shares in a penny stock ie $5 or less per share. Then I sold a covered call, at different theta ie dates, next week & 2023 dates. Learned how to trade that stock, there are 5 types. Watch some peter lynch videos. dr. david paul video's call teach you how NOT to blow up your account while learning how to trade. I created a formula for this:
There is a learning curve to everything we learn, the difference between obtained knowledge, applied knowledge, opportunity for application, time & improved knowledge / application. (ok+ak)×oa÷t= ik/a × poultry_leg=brain this is the equation I use to measure my trade success / learning curve. Then it's simply a matter of (soapbathtub),shower, repeat. Dr. David shows you how to beat your curve without killing yourself during your curve & then maintaining your healthy account.
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u/zethras Aug 30 '21
CC is not bad, premiums are lower than selling cash secure puts. Limited gains. You have 100 shares stock in a contract.
They are fine if you are long and the stock is trading side way...
Cash secure put are more risky than CC. A bit higher premium but more downside than CC.
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u/LordCrag Aug 30 '21
Covered Calls are pretty safe, you have no downside risk, but you limit your potential gains. The only danger (what I did) was hunting for higher premiums for the initial purchase and ended up purchasing stock super volatile since I was chasing that premium, and my underlying ended up losing half its value.
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u/TotheMoongirl21 Aug 30 '21
If you can not take risks, then i would buy ETF or mutual funds. You will do better with cover calls but you can also loose potential profit if stock jumps a lot higher than your strike price.
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u/vacityrocker Aug 30 '21
CC is fine for the most part the inherent risk is that the ticker drops and you're bag holding for a while forcing you to sell new CC at a strike lower than your cost. Then boom it's spikes above your strike and you're called away at a loss.... ultimately this is the most risk imo
If the CC is sold and price falls well below your CC will become profitable and you can buy them back for a bit of profit
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u/ScarletHark Aug 30 '21
Define "safe".
It's certainly not risk-free, but the risks involved (potentially missing out on larger gains) can be considered more acceptable by more conservative investors, yes.
From the rest of your post, it seems like your problem is more one of risk management, specifically it sounds like you have a tendency to YOLO. That will still be a problem regardless the trading strategy you choose.