Comments on: Market Sell-Off = Opportunity http://www.callwriter.com/blog/2007/10/19/market-sell-off-opportunity/ Thu, 09 Sep 2010 08:26:22 +0000 http://wordpress.org/?v=2.1 By: Ken http://www.callwriter.com/blog/2007/10/19/market-sell-off-opportunity/#comment-147 Ken Sun, 28 Oct 2007 01:41:48 +0000 http://www.callwriter.com/blog/2007/10/19/market-sell-off-opportunity/#comment-147 John: What do you think about selling deep in the money calls with the market possibly cracking at this Dow 14k level? I'm trying to rack up 2-3% safely with deep near month in the money calls. I'm selling cov calls on 130k and I hate to take a hit in valuation but would like to get some decent cash inflow. I know you probably dont want to hear this but Im following the technique of Hooper and Zalewski who have techniques to earn income on a downtrending market as well as an uptrending one. I just like to be in the uptrend and get called out each month. Ken John:

What do you think about selling deep in the money calls with the market possibly cracking at this Dow 14k level? I’m trying to rack up 2-3% safely with deep near month in the money calls. I’m selling cov calls on 130k and I hate to take a hit in valuation but would like to get some decent cash inflow. I know you probably dont want to hear this but Im following the technique of Hooper and Zalewski who have techniques to earn income on a downtrending market as well as an uptrending one. I just like to be in the uptrend and get called out each month.

Ken

]]> By: John Brasher http://www.callwriter.com/blog/2007/10/19/market-sell-off-opportunity/#comment-148 John Brasher Sun, 28 Oct 2007 03:24:01 +0000 http://www.callwriter.com/blog/2007/10/19/market-sell-off-opportunity/#comment-148 Hi Ken, although no one offers anything like my SuperPut lists, the truth is that no one has a lock on covered call wisdom; the "secrets" are all out there. Their technique is no different essentially than anyone else's, because we are all playing with the same Tinkertoys. Forget about rules for a moment: the only rule that makes sense is to look at what the stock is doing and ask yourself how to make a buck off it. The best return, uncalled, always is the current-month ATM call. To write anything else, you should have an articulable reason. DITM calls are used on downtrending stocks, stocks at major resistance or other obvious failure points, and on stocks that trade in a wide true range (written at range tops). Selling DITM calls makes no sense unless the stock is falling or you think it about to fall and you want 1) more downside protection and 2) the ability to buy back the calls for a profit if the stock falls. As the stock falls, the DITM calls should be rolled down as opportunity permits or necessity dictates. Similarly, be very cautious about rolling too far. Writing at or below major support usually is a mistake, because a snapback in the stock traps you in the deep call and having to buy it back. Let the STOCK tell you what trades to put on. On the other hand, if the stock is moving up strongly, does it make more sense to write a call than hold the stock? Not usually. A CW member wrote recently about RIMM, which he bought at $38, now $125. He keeps having to buy back his short calls (incurring trade debits and increasing his cost basis) to roll them up, giving away much of the stock's rise. I suggested he get out of the stock's way and let it rise; perhaps BUY some calls and hold them for extra pop, or write higher-strike calls against them to create bull call spreads. You can't argue with the chart. RIMM is no doubt overvalued, but it's a rising star and not very appropriate for covered calls, unless you are content to write it and be called out for a profit; buying it again and writing it. But to hold it long term and keep rolling calls as it rises is just arguing with the chart. See the difference? If a stock has fallen to major support and is recovering, then you have the RIMM situation, don't you? Though I love covered calls, they are not always the only solution, nor even the best solution. Regarding your market question, we just had a correction of over 1,500 points. I don't think another major one is in order, although with this volatility and lack of conviction in the equities market anything can happen. Another major correction probably will be a double top and the effective end of the bull market -everybody is seeing the same chart as you. Playing the volatility is the right thing. Sell calls at the high, roll them down; wait a while to write calls as the stock recovers so as not to be trapped in a lower strike call. While we're at it, why not buy a multi-month protective put on the falling stock? If the stock finds support and seems to want to recover, sell the put; otherwise exercise it once you're tired of pulling premium out of it and profits from the rolls down. Remember, you can always sell the put. Are you closing the calls advantageously as the stock trades in its natural weekly or monthly range? Hi Ken, although no one offers anything like my SuperPut lists, the truth is that no one has a lock on covered call wisdom; the “secrets” are all out there. Their technique is no different essentially than anyone else’s, because we are all playing with the same Tinkertoys. Forget about rules for a moment: the only rule that makes sense is to look at what the stock is doing and ask yourself how to make a buck off it. The best return, uncalled, always is the current-month ATM call. To write anything else, you should have an articulable reason.

DITM calls are used on downtrending stocks, stocks at major resistance or other obvious failure points, and on stocks that trade in a wide true range (written at range tops). Selling DITM calls makes no sense unless the stock is falling or you think it about to fall and you want 1) more downside protection and 2) the ability to buy back the calls for a profit if the stock falls. As the stock falls, the DITM calls should be rolled down as opportunity permits or necessity dictates. Similarly, be very cautious about rolling too far. Writing at or below major support usually is a mistake, because a snapback in the stock traps you in the deep call and having to buy it back. Let the STOCK tell you what trades to put on.

On the other hand, if the stock is moving up strongly, does it make more sense to write a call than hold the stock? Not usually. A CW member wrote recently about RIMM, which he bought at $38, now $125. He keeps having to buy back his short calls (incurring trade debits and increasing his cost basis) to roll them up, giving away much of the stock’s rise. I suggested he get out of the stock’s way and let it rise; perhaps BUY some calls and hold them for extra pop, or write higher-strike calls against them to create bull call spreads. You can’t argue with the chart. RIMM is no doubt overvalued, but it’s a rising star and not very appropriate for covered calls, unless you are content to write it and be called out for a profit; buying it again and writing it. But to hold it long term and keep rolling calls as it rises is just arguing with the chart. See the difference?

If a stock has fallen to major support and is recovering, then you have the RIMM situation, don’t you? Though I love covered calls, they are not always the only solution, nor even the best solution.

Regarding your market question, we just had a correction of over 1,500 points. I don’t think another major one is in order, although with this volatility and lack of conviction in the equities market anything can happen. Another major correction probably will be a double top and the effective end of the bull market -everybody is seeing the same chart as you. Playing the volatility is the right thing. Sell calls at the high, roll them down; wait a while to write calls as the stock recovers so as not to be trapped in a lower strike call.

While we’re at it, why not buy a multi-month protective put on the falling stock? If the stock finds support and seems to want to recover, sell the put; otherwise exercise it once you’re tired of pulling premium out of it and profits from the rolls down. Remember, you can always sell the put.

Are you closing the calls advantageously as the stock trades in its natural weekly or monthly range?

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