I was fairly clueless to option trading before this year. I understood the basic concepts but never did any.
I’ve been getting into covered call writing and really enjoying it. But I’m wondering if there’s anyone else here with experience so I don’t make bad mistakes. I’m kind of winging it.
My general concept has been to buy either of two types of stocks:
those with low P/E and I am bullish on. Like Walgreens and CVS. So that if the stock drops significantly, I don’t feel bad about holding it.
those with low per share prices, of $50 or less, with massive volatility. The WSB meme stocks like Rocket mortgage (RKT) whereby there’s enormous IV priced into the option. For example, I bought shares of rocket this week around $19.75 and sold $20 covered calls for 27 cents expiring in a few days. The reason is that these must be done in 100 share increments so buying $5k of a stock to write options on is appropriate for my portfolio size. But buying 100 shares of Tesla at $400 is not.
So rocket got called away and I make 50 cents per share. If rocket dropped, I’d keep it and sell more calls. It did get called
I have also been toying with a third class:
- low p/e and high dividend in an industry I’m bullish on like archer daniel midland. For these, sell 2 year LEAPS calls. As a rough example, I bought some for $45 a share, it pays a 4% dividend, and the 2 year $50 calls were $4.
So if they get called away I make $9 per share plus the 4% dividends per year for 2 years. Unless they get called early, but then I free up my capital sooner.
If it drops 10% then I broke even given the option premium I pocketed.
A few random thoughts I’m not sure of:
When the stock drops a lot, because it’s a volatile stock, I’m not sure if I should sell new calls after the weeklies expire, or if I hold and wait for it to go up, and then sell calls while it’s back up. On one hand, I make more money waiting, assuming it does pop up and down 5% each week. On the other hand it could stay down or drop further and I’m getting nothing in option premiums by waiting.
So lately on volatile stocks if they drop 10%, I buy more. And then sell options based on being slightly higher than the average cost of my shares.
Example, I bought rocket at around 22, sold some worthless calls, it dropped to 17, I bought more, my average cost per share was 19.50 so I sold $20 strike calls. The problem is this strategy assumes it goes back up. It could drop to 14 and I buy more and then 12 and I buy more and I’m catching a falling knife.
It seems like the more the stock moves drop, the more the IV. By definition, so the more option premium I get.
A few times I had a stock, Redfin was one, I bought around 42, wrote 45 calls, and it spiked to 50 in the middle of the 3-week call I wrote, but dropped back down just below 45 at expiration and I kept it. Plus the $4 per share option premium. And repeated the following week. So with these massive volatility stocks, it seems like doing 3 week ones can be worthwhile.
A few times I wrote a 3 or 4 week call option, and it dipped, so I closed out the option, by buying a call from someone else, and made a slight profit, and sat on the stock a few days for it to go back up. And then I sold new calls for a lot more money. Compared to if I had held until expiration.
Bid-ask spreads suck on a lot of these thinly traded options. For those I need to hold to expiration to let expire worthless or get called away.
This week I got burned a bit by CVS since I was very bullish on them but the stock has been doing poorly so I wrote options only a few dollars above what I paid. And today they spiked 5% above my strike price and I missed out on potential tendies. This was my mistake because I didn’t realize earnings was today and otherwise I might not have sold options this week. Since I’d want to take the bet myself.
Overall it seems like a fascinating way to make money. I consider it a hybrid cash-stock investment, since it’s generating cash flow but there’s equity risk in it. Although depending on how I play, the risk is smaller.
I had an idea that I’m playing with today of selling ITM calls. For example since my shares of palantir got called away today, I bought some more shares at $14 and sold ITM $11.50 calls for $2.91 to strike in 2 weeks.
So if palantir stays high, the. I made 41 cents per share in option premium since it will get called away in 2 weeks. That’s 2.9% gain for 2 weeks or 76% annualized return.
If palantir drops below 11.50, I keep it, and that sucks because I paid 14, but I got 2.91 per share so it has to drop below 11.10 for me to have lost money. And even if it does, I’ll write $11.50 calls on it for another 2 weeks.
I’m still trying to figure this stuff out and not sure if there’s any good resources to discuss it.