Tags |
|
|
Links |
|
|
Actual for You - Why Covered Call Traders Lose Money
Don’t forgive the people who haven’t supported you in the past.That’s right – you read correctly. I don’t want you to forgive them.I want you to thank them.Every day, in my head, I thank the people who said I wouldn’t be able to start my first business at age 15. Every day I thank the people who thought I would fail opening a real estate agency at 21.When people expect you to fail or don’t support your endeavours you can do two things. You can believe them. Or you can show them. I know which I chose to do. What’s your choice going to be?I chose to use their negativity as fuel for my energy and drive. I used their words as motivation when I was feeling low. I decided that success was the best and only form of revenge I would ever enact on these people.In life you are always going to encounter negative people. If you don’t meet these negative people you will never know the following: How much you should love and appreciate the positive and supportive people i
- When the stock is below the breakeven
- When the stock is below the support
- Stock > strike for OTM
- Stock < strike for ITM
Next is how many positions to trade
Do you worry about your debt? Are you only making minimum payments on credit cards or already over the limit? Many people are in the same situation. Most are living paycheck to paycheck and have nothing left when the bills are paid. Bankruptcy may seem like a way out, but debt consolidation can be a better option.What is debt consolidation? Debt consolidation is combining loans and unsecured credit into one monthly payment. The goal is to lower the amount you pay each month, while also reducing the interest rate. This can be beneficial in many ways.First and foremost is that you will pay off your debts sooner. By paying lower interest rates, more of your payment is being applied to principle every month. This eliminates the frustration of looking at balances that never seem to decrease. We all know that minimum payments are designed to keep us in debt. Debt consolidation can give you a sense of accomplishment by seeing actual progress.Debt consolidation can also
However, if you want to do better than the market, you better have a plan. Covered Calls is a way to do so.
Covered calls are the most conservative of all the various option strategies. It seems pretty simple but, many people have trouble making money with them. Most of their problems are one of four things: (1) failure to properly screen good CC candidates (2) failure to monitor and manage your positions once in them (3) not being in enough positions to be diverse and (4) not trading with enough money and thus commissions and taxes take most or all of your profits.
(1) Failure to properly screen positions
I use OptionsXpress and they are great, but at the time of this writing, their covered call screener is lacking. The best one I have found is at Option Monitor. It costs only $35 per month and can screen for about twenty different items. The very useful ones that I use that OptionsXpress do not have are percentage in or out of the money, market capitalization, and percentage above or below the 52wk high or low. Paying another service around $60 or more per month so they can use their "special screener" to show you pre-screened choices is a waste of your money.
Some CC writers just starting out (like myself) go to a site like coveredcalls.com and look at the highest yielding CC positions and go to town. This is an absolute recipe for disaster (I lost 40% in three days, luckily I was paper trading). Those stocks are WAY too volatile and are usually tiny medical related companies. A good CC trader should be very picky in which positions he is going to use.
(2) Management
I learned about CC's from a guy who was trading during the roaring bull market in 1999-2000 and got absolutely slammed when the market crashed. One of the fundamental things he did wrong was that he failed to set STOP orders for his positions and ended up loosing about 70-80% after he couldn't produce cash for margin calls. Determining your exit strategy is absolutely vital to any CC trader.
Another item that deals with management is rolling up, down, or out. Some CC traders look at just their account balance to see how they are doing.
If your stock has gone down but is still good fundamentally, is rolling down a good option? What if the option has lost all of its time value and rolling out right now can lock in your profit? The bottom line is that you can not just look at the current prices in your account and determine if you should do anything. You need a calculation tool to tell you when you should make management decisions. I have created and currently use an excel spreadsheet that I think is fantastic. It calculates multiple items such as
- Returns if flat and Returns if called out
- Current Return based on current prices of the stock and option
- Shows a roll-over option for rolling up or down
- Downside protection percentage
- Percentage ITM or percentage OTM
- When the stock is below the breakeven
- When the stock is below the support
- Stock > strike for OTM
- Stock < strike for ITM
Next is how many positions to trade w
One of the most enjoyable of all businesses to run, at least for those with the skill to run it, is a bakery. After all, being surrounded by cakes, pies and other pastries all day is a dream come true for many people.No matter how skilled a baker you are, however, you will be unlikely to succeed in the bakery business without the foundation provided by a bakery business plan. Such a business plan is an essential part of running any type of business, including a bakery business.==Planning For Tax And Liability Issues==That is because not only will a bakery business plan be essential to raising startup capital and ongoing operational costs, but it will be an important document when it comes to planning for taxes and liability issues as well.==The Structure Of Your Business==For instance, how you structure your business can have a significant impact on your potential personal liability, and a solid bakery business plan can help you plan for the structure of your busi
(1) Failure to properly screen positions
I use OptionsXpress and they are great, but at the time of this writing, their covered call screener is lacking. The best one I have found is at Option Monitor. It costs only $35 per month and can screen for about twenty different items. The very useful ones that I use that OptionsXpress do not have are percentage in or out of the money, market capitalization, and percentage above or below the 52wk high or low. Paying another service around $60 or more per month so they can use their "special screener" to show you pre-screened choices is a waste of your money.
Some CC writers just starting out (like myself) go to a site like coveredcalls.com and look at the highest yielding CC positions and go to town. This is an absolute recipe for disaster (I lost 40% in three days, luckily I was paper trading). Those stocks are WAY too volatile and are usually tiny medical related companies. A good CC trader should be very picky in which positions he is going to use.
(2) Management
I learned about CC's from a guy who was trading during the roaring bull market in 1999-2000 and got absolutely slammed when the market crashed. One of the fundamental things he did wrong was that he failed to set STOP orders for his positions and ended up loosing about 70-80% after he couldn't produce cash for margin calls. Determining your exit strategy is absolutely vital to any CC trader.
Another item that deals with management is rolling up, down, or out. Some CC traders look at just their account balance to see how they are doing.
If your stock has gone down but is still good fundamentally, is rolling down a good option? What if the option has lost all of its time value and rolling out right now can lock in your profit? The bottom line is that you can not just look at the current prices in your account and determine if you should do anything. You need a calculation tool to tell you when you should make management decisions. I have created and currently use an excel spreadsheet that I think is fantastic. It calculates multiple items such as
- Returns if flat and Returns if called out
- Current Return based on current prices of the stock and option
- Shows a roll-over option for rolling up or down
- Downside protection percentage
- Percentage ITM or percentage OTM
- When the stock is below the breakeven
- When the stock is below the support
- Stock > strike for OTM
- Stock < strike for ITM
Next is how many positions to trade
In todays environment we all get too many e-mails that we prefer to not receive. Many are spam, some are even from people who have found us that we prefer to not communicate with. One thing is clear though, when sending e-mail you hope that your e-mail does not fall into either of those categories causing your e-mail to possibly not get opened.All too often onliners misuse the Subject: field thereby hindering the potential of their e-mail being opened resulting in their messages being deleted or sent to trash. A recent study reflects that 41.1% of recipients determine whether they open an e-mail by virtue of the Subject: field!Follow these three simple Subject: field tips to give your e-mails the best chance of being opened: Always include an appropriate, short and accurate Subject:. Many e-mail programs auto delete subjectless e-mail to Junk/Trash. You also want to avoid using words such as hello, hi and help as these may trigger spam filters. Type yo
(2) Management
I learned about CC's from a guy who was trading during the roaring bull market in 1999-2000 and got absolutely slammed when the market crashed. One of the fundamental things he did wrong was that he failed to set STOP orders for his positions and ended up loosing about 70-80% after he couldn't produce cash for margin calls. Determining your exit strategy is absolutely vital to any CC trader.
Another item that deals with management is rolling up, down, or out. Some CC traders look at just their account balance to see how they are doing.
If your stock has gone down but is still good fundamentally, is rolling down a good option? What if the option has lost all of its time value and rolling out right now can lock in your profit? The bottom line is that you can not just look at the current prices in your account and determine if you should do anything. You need a calculation tool to tell you when you should make management decisions. I have created and currently use an excel spreadsheet that I think is fantastic. It calculates multiple items such as
- Returns if flat and Returns if called out
- Current Return based on current prices of the stock and option
- Shows a roll-over option for rolling up or down
- Downside protection percentage
- Percentage ITM or percentage OTM
- When the stock is below the breakeven
- When the stock is below the support
- Stock > strike for OTM
- Stock < strike for ITM
Next is how many positions to trade
Financial patterns in your industry assist in maximizing your advertising, sales and telemarketing dollars by revealing any stagnant or active patterns. Options of how to succeed are endless if you find the right goal and plan that will get you the result you want. Is steady growth for your company best, a grand entry or growth slam? How does your company fit in the industry? Is your company/technology/brand coming of age, or has it been around forever?Spend time researching the industry while asking yourself how it can best be penetrated or saturated. Assess the general and global need to guide in establishing clearly defined achievable goals and objectives. The bull’s eye is all in how well your new business development list criteria fit your target market. It is where you will get the biggest bang for your new business budget buck.When market results show room for substantial growth, invest in clerical services to sample your list for accuracy first. Check the number, make sure the contact exists,
Another item that deals with management is rolling up, down, or out. Some CC traders look at just their account balance to see how they are doing.
If your stock has gone down but is still good fundamentally, is rolling down a good option? What if the option has lost all of its time value and rolling out right now can lock in your profit? The bottom line is that you can not just look at the current prices in your account and determine if you should do anything. You need a calculation tool to tell you when you should make management decisions. I have created and currently use an excel spreadsheet that I think is fantastic. It calculates multiple items such as
- Returns if flat and Returns if called out
- Current Return based on current prices of the stock and option
- Shows a roll-over option for rolling up or down
- Downside protection percentage
- Percentage ITM or percentage OTM
- When the stock is below the breakeven
- When the stock is below the support
- Stock > strike for OTM
- Stock < strike for ITM
Next is how many positions to trade
Ever heard of the “80/20 Rule”? That’s the well-known principle that says that in every sales organization 20% of the salespeople win 80% of the sales (and money!) while the remaining 80% are all splitting up 20% of the revenue. So, which category do you want to be a part of - the Top 20%, or what I refer to as the Sales HEROES, right?Where did this rule come from? In fact, the 80/20 rule is not a rule, it’s a “law.” It comes from the work of Vilfredo Pareto, an eighteenth-century Italian economist. His studies on economics and productivity led to the conclusion that in just about any endeavor, 80 percent of the productivity will come from only 20 percent of the efforts. Eighty percent of the profits are produced by 20 percent of the employees. In a police force, 80 percent of the arrests are made by 20 percent of the officers. It can be applied another way: 20 percent of a business’s customers create 80 percent of the problems. And so on.Want to be a Sales HERO? You can use Pareto’s Law to your a
- When the stock is below the breakeven
- When the stock is below the support
- Stock > strike for OTM
- Stock < strike for ITM
Next is how many positions to trade with? This is a very important question. A great book by Burton G Malkiel, A Random Walk Down Wall Street, has an explanation about the differences between systematic and unsystematic risk. To summarize, systematic risk is the fundamental risk of the market as a whole. Since the market has risk and all stocks follow the market to an extent, systematic risk CAN NOT BE DIVERSIFIED AWAY. Systematic risk is the risk of the market.
Unsystematic risk is the risk of individual companies such as them getting sued, the CEO getting caught lying to shareholders, or inventing a miracle drug. It is this unsystematic risk that can be diversified away. So how many positions should you get into?
The above book has a graph that unsystematic risk goes down exponentially to zero after twenty stocks (how he got twenty I am not sure, but it makes sense). So should you get into twenty positions? No, because CC's offer downside protection. My personal feeling is at least five, but preferably seven to ten. More than ten is fine, but I think you are all ready diversified enough and are just wasting your time and trading expenses.
If a CC trader does not take diversification into account, he/she is asking for trouble. Just like an "investor" needs to be diversified, so does a covered calls "trader". Therefore, you need to develop some sort of method to track which industries you are currently in. A great way to do that is to use my covered call calculator. In it there is a section to enter the industry so you do not forget which industries you are all ready invested in.
(4) Money Management
Covered calls have their disadvantages, to think otherwise is naive. One of them is that you have double the amount of trades than just owning stock and thus commissions are around twice as much (but usually more since option commissions are generally higher)
Also, if done outside an IRA, there will be short term capital gain tax rates
"Capital gains on assets held for a year or less are taxed at your ordinary income tax rate (anywhere from 28% to 39.6%, depending on your specific ordinary tax rate). Capital gains on assets held for more than a year are taxed at a reduced tax rate of 20%"
At the time of this writing, OptionsXpress charges $12.95 for an option buy or sell (but $0 for being called out) and $9.95 for a stock (these are both the active trader discount, both go up to $14.95 without the active, however if you do not qualify for this, you are not following rule 3). So the minimum transaction cost per position is (2x$9.95 + $12.95) $32.85.
The following is an explanation of how much you should invest in per position taking into account taxes and trading costs. Let us assume a standard profit of 3% per position (this is very reasonable). The following is how much money 3% is for different amounts of position values.
- $2000 - $60
- $3000 - $90
- $4000 - $120
- $5000 - $135
HTTP = HTML link (for blogs, profiles,phorums):
<a href="http://www.actual4u.com/article/102517/actual4u-Why-Covered-Call-Traders-Lose-Money.html">Why Covered Call Traders Lose Money</a>
BB link (for phorums):
[url=http://www.actual4u.com/article/102517/actual4u-Why-Covered-Call-Traders-Lose-Money.html]Why Covered Call Traders Lose Money[/url]
Related Articles:
Taking Action - Tip For Successfully Taking Action
Credit Card Debt Consolidation Loan: Ease Off Your Debts!
Bookmark it:
|