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sagitarius84 (40.82)

Using Covered Call Options Strategy for cutting losses on financials



April 10, 2009 – Comments (2) | RELATED TICKERS: USB , WFC , BAC

The current bear market has been a heaven for sellers of covered calls. I have mentioned earlier the pros and cons of selling covered calls. Typically I am not a big believer in cutting my profits and lowering my risk reward expectancy in exchange for the options premium. Furthermore I would hate to have a situation where a stock I like is called in and I would have to buy it back at higher levels.

Covered Calls do make sense to me however for a stock that has either not increased its dividend or for stocks in which I have a large paper loss.
Let us look into the first example, where one is sitting at a paper loss and they are willing to decrease it. The severity of the loss that would make you sell covered calls varies from individual to individual based off their risk tolerance. Let’s look at US Bancorp (USB) for example. The stock has been punished this year after losing more than half of its value year to date as investors are losing trust in the US financial system. In addition to that US Bancorp recently cut its dividends by 88%, which was a major red flag and a sell signal for me. If you are still holding on to that position however, waiting for the upturn in the company’s financial situation, selling covered calls against your position might be the only way to generate more income from the stock. Continue Reading...


2 Comments – Post Your Own

#1) On April 10, 2009 at 8:44 AM, sagitarius84 (40.82) wrote:

What is your experience with selling Covered Calls?

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#2) On April 11, 2009 at 2:21 AM, checklist34 (98.58) wrote:

I have sold covered calls in this bear market.  The recent big rally has left me more or less broke even on calls sold after the first few days of rally in mid-march.  I sold covered calls at prices well above the market.  $12.50 on ASH, $7.50 on TCK and on and on, only to see the stocks go far beyond the strike price.  

In a falling market selling covered calls is great.  In a flat market its great.  In a really realy rapidly up market, it can leave you with less profit than you would have had.

I like the strategy, its no-lose.  If the stock is flat or down, you win as you get the premium.  If you sell the call at a price you are satisfied selling at, you win.  The only way to "lose" is to wind up selling lower htan you could have. 

Another way to lose is if you plan to use the callst o trim your portfolio.  You want to sell, say, 1/2 of your shares of XL so you sell covered calls at 5 or 7.50.  What if it falls to 4.95 by friday?  then you'll wind up not trimming.

Say you sell covered calls at 25% above current levels on your whole portfolio.  And one of the stocks you own reports huge earnings and invents a cure for cancer.  You lose those shares for +25% when they went +100%.  Say another of the stocks reports bankruptcy, you keep those shares.  So in a way selling covered calls can lead to you keeping the worst companies and having the best called from you.

Its a good strategy with a couple of limitations.  Like every tool in the stock markets, it has value, but isn't a free lunch.

I've both profited and suffered for it, but like everything I'm pretty conservative and so...  overall I am satisfied with my use of covered calls.

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