Selling covered calls - anyone here with experience who can answer questions?

[frozen]

I have been reading about options strategies and decided to try it out for the first time yesterday by selling a covered call against my 100 shares of Palantir on E*TRADE. The strike price is $23.50 and the contract expires tomorrow,
April 1.
This was just an experiment to see how it works.

Questions:

Right now I see Palantir is above the strike price at $23.65. Does this mean that all 100 of my shares will be sold?

Is the April 1 expiration at the end of the trading day?

[Financial.Velociraptor]

If the stock closes at or above the strike price on expiry day, shares will be called away.  That is, sold at the strike price.  All 100 shares will be sold.

[frozen]

If the stock closes at or above the strike price on expiry day, shares will be called away.  That is, sold at the strike price.  All 100 shares will be sold.

Ok, so it’s tomorrow’s closing price. Thanks!

[Financial.Velociraptor]

@frozen

Note that in US "American" style options can be exercised any time up to an including expiry.  There is a small but not zero chance of getting called away early.  It is usually a poor decisions by the counterparty that exercises because they forfeit the remaining time value that could have been sold into the market.  But it does happen.   Usually when an option is deeply in the money, near expiry, and just before ex-dividend dates.

[frozen]

@frozen

Note that in US "American" style options can be exercised any time up to an including expiry.  There is a small but not zero chance of getting called away early.  It is usually a poor decisions by the counterparty that exercises because they forfeit the remaining time value that could have been sold into the market.  But it does happen.   Usually when an option is deeply in the money, near expiry, and just before ex-dividend dates.

Thank you for the additional context. It looks like Palantir closed at $23.29 today. My strike price is $23.50 and the call expires tomorrow. I make a tiny profit no matter what happens.

[talltexan]

@frozen, I imagine you're trying this strategy because you're hoping for a less volatile return. It may well be that--instead of re-buying the Palantir shares at market price to sell another covered call--selling a put option will be to your liking.

I usually go deep out of the money on my puts, because my goal was to get something approaching market-returns on my money, i.e. perhaps only 1%/month. @Financial.Velociraptor may indeed have done better by trading at strike prices close to the underlying market price.

[frozen]

@frozen, I imagine you're trying this strategy because you're hoping for a less volatile return. It may well be that--instead of re-buying the Palantir shares at market price to sell another covered call--selling a put option will be to your liking.

I usually go deep out of the money on my puts, because my goal was to get something approaching market-returns on my money, i.e. perhaps only 1%/month. @Financial.Velociraptor may indeed have done better by trading at strike prices close to the underlying market price.

Thanks! I was reading about cash secured puts — getting paid to wait for a stock to go down and buying at good strike price instead of placing a limit order. I might try this next.

[talltexan]

It obviously depends a little bit on the stock and the market's collective assessment of its volatility. If you are trading a dividend-payer, it may make sense to attempt to sell calls enough out of the money that the fees from those calls--plus the dividends--will double the hoped for safe withdrawal rate of 4%.

[frozen]

It obviously depends a little bit on the stock and the market's collective assessment of its volatility. If you are trading a dividend-payer, it may make sense to attempt to sell calls enough out of the money that the fees from those calls--plus the dividends--will double the hoped for safe withdrawal rate of 4%.

Still learning the lingo here — I need to look up “in the money” and “out of the money.”

Anyway, with less than 3 hours to expiry, Palantir is at $22.97, and I want it to stay there so my shares aren’t sold. My premium was tiny on this first one — only $7, but I just wanted to give it a try on something pretty low risk.

[Rob_bob]

It obviously depends a little bit on the stock and the market's collective assessment of its volatility. If you are trading a dividend-payer, it may make sense to attempt to sell calls enough out of the money that the fees from those calls--plus the dividends--will double the hoped for safe withdrawal rate of 4%.

Still learning the lingo here — I need to look up “in the money” and “out of the money.”

Anyway, with less than 3 hours to expiry, Palantir is at $22.97, and I want it to stay there so my shares aren’t sold. My premium was tiny on this first one — only $7, but I just wanted to give it a try on something pretty low risk.

If your shares were called away you could sell a cash secured Put for the same strike price or lower and collect a premium to buy them back.

[chasesfish]

I've also been playing around with this...

I'm in the lower risk spectrum, my goal is to make 1-2%/year on top of my portfolio.

My general strategy is to sell covered calls 1 month out, then a few days before expiration buy to close the position and sell a new one a month out, then just keep repeating the process.   Some months I win, some months I lose, but long term I'm just gaining the time premium for essentially selling an insurance contract.  I close it a few days prior because I don't want the stock to be called and trigger capital gains.

I'm much more careful with puts, I've been steamrolled three times selling puts when something changes with the company.   I now only sell a minimal number of puts.

[ChpBstrd]

Note that if your expiration date is on a Friday, usually the shares will still show in your account on Saturday morning, only to be assign later that day or on Sunday. Settlement occurs the following day, but apparently the buyer of your call gets a little extra time to watch the after-hours trading on Fridays.

With a volatile stock like Palantir, and a zero-commission broker, you could profitably trade in and out of the stock by getting your covered calls and short puts assigned, harvesting time value the whole way. The problem with either covered calls or short puts is they have limited upside and full downside. So if your stock goes up, you miss much of the gains, and if the stock goes down, you suffer much of the losses. If you just held the stock by itself, you get all the gains and all the losses which is at least a fair coin flip. The time value you collect is what is being offered to compensate you for the chance you miss out on gains while being exposed to all the downside risk.

In that sense, a covered call or short put is a bet that the stock will neither fall further than the premium you received from the sale of the option, plus the gap between current price and option price, nor rise further than that much. A CC or SP will be a better choice than holding the stock if the stock's price changes less than that much, and it will be a worse choice if a big move happens.

E.g. If the stock is $25 and I sell a covered call at the 25 strike for $1, I'll regret that decision if the stock goes up to $27. I held all the risk of the stock going down except for the $1 received, but instead of getting the full $2 gain in return I only got $1 out of it. I would have been better off holding the stock, because for almost the same risk I could have enjoyed $2 in gains instead of $1. Now if I want to re-enter the position, I have to pay more for the stock, which is like buying high and selling low.

E.g.2: It is the same calculation with a short put. If the stock is $25 and I sell a cash-secured put at the $25 strike for $1, I'll regret that decision if the stock rises farther than $1, because I just took on most of the risk for a smaller reward than I'd receive had I just bought the stock in the first place.

[frozen]

Note that if your expiration date is on a Friday, usually the shares will still show in your account on Saturday morning, only to be assign later that day or on Sunday. Settlement occurs the following day, but apparently the buyer of your call gets a little extra time to watch the after-hours trading on Fridays.

With a volatile stock like Palantir, and a zero-commission broker, you could profitably trade in and out of the stock by getting your covered calls and short puts assigned, harvesting time value the whole way. The problem with either covered calls or short puts is they have limited upside and full downside. So if your stock goes up, you miss much of the gains, and if the stock goes down, you suffer much of the losses. If you just held the stock by itself, you get all the gains and all the losses which is at least a fair coin flip. The time value you collect is what is being offered to compensate you for the chance you miss out on gains while being exposed to all the downside risk.

In that sense, a covered call or short put is a bet that the stock will neither fall further than the premium you received from the sale of the option, plus the gap between current price and option price, nor rise further than that much. A CC or SP will be a better choice than holding the stock if the stock's price changes less than that much, and it will be a worse choice if a big move happens.

E.g. If the stock is $25 and I sell a covered call at the 25 strike for $1, I'll regret that decision if the stock goes up to $27. I held all the risk of the stock going down except for the $1 received, but instead of getting the full $2 gain in return I only got $1 out of it. I would have been better off holding the stock, because for almost the same risk I could have enjoyed $2 in gains instead of $1. Now if I want to re-enter the position, I have to pay more for the stock, which is like buying high and selling low.

E.g.2: It is the same calculation with a short put. If the stock is $25 and I sell a cash-secured put at the $25 strike for $1, I'll regret that decision if the stock rises farther than $1, because I just took on most of the risk for a smaller reward than I'd receive had I just bought the stock in the first place.

Thanks for this perspective. My expiration date was yesterday and the call did not hit the strike price of $23.50. I still see it in my account today, and I’m thinking of trying another covered call.

How do you best choose a stock for a covered call strategy? Would Pfizer work well? They are priced under $40 and have low volatility, plus they pay a dividend.

[ChpBstrd]

Note that if your expiration date is on a Friday, usually the shares will still show in your account on Saturday morning, only to be assign later that day or on Sunday. Settlement occurs the following day, but apparently the buyer of your call gets a little extra time to watch the after-hours trading on Fridays.

With a volatile stock like Palantir, and a zero-commission broker, you could profitably trade in and out of the stock by getting your covered calls and short puts assigned, harvesting time value the whole way. The problem with either covered calls or short puts is they have limited upside and full downside. So if your stock goes up, you miss much of the gains, and if the stock goes down, you suffer much of the losses. If you just held the stock by itself, you get all the gains and all the losses which is at least a fair coin flip. The time value you collect is what is being offered to compensate you for the chance you miss out on gains while being exposed to all the downside risk.

In that sense, a covered call or short put is a bet that the stock will neither fall further than the premium you received from the sale of the option, plus the gap between current price and option price, nor rise further than that much. A CC or SP will be a better choice than holding the stock if the stock's price changes less than that much, and it will be a worse choice if a big move happens.

E.g. If the stock is $25 and I sell a covered call at the 25 strike for $1, I'll regret that decision if the stock goes up to $27. I held all the risk of the stock going down except for the $1 received, but instead of getting the full $2 gain in return I only got $1 out of it. I would have been better off holding the stock, because for almost the same risk I could have enjoyed $2 in gains instead of $1. Now if I want to re-enter the position, I have to pay more for the stock, which is like buying high and selling low.

E.g.2: It is the same calculation with a short put. If the stock is $25 and I sell a cash-secured put at the $25 strike for $1, I'll regret that decision if the stock rises farther than $1, because I just took on most of the risk for a smaller reward than I'd receive had I just bought the stock in the first place.

Thanks for this perspective. My expiration date was yesterday and the call did not hit the strike price of $23.50. I still see it in my account today, and I’m thinking of trying another covered call.

How do you best choose a stock for a covered call strategy? Would Pfizer work well? They are priced under $40 and have low volatility, plus they pay a dividend.

Options are relatively cheap for low-vol stocks, and relatively expensive for high-vol stocks, so you get what you pay for - or get paid for - in that regard. To compare one's choices, look at the "delta" metric. The delta represents the expected movement in the price of the option if the underlying stock moves one dollar and all else stays the same (volatility, interest rates, etc.). It is also a rough proxy for the odds the market is putting on that option being in-the-money and worth something at expiration.

I've had good luck lately selling covered calls around the 0.10 delta. I had been selling CC's around the 0.30 delta, but kept losing my shares in the middle of the bull market.

[Financial.Velociraptor]

Settlement occurs the following day, but apparently the buyer of your call gets a little extra time to watch the after-hours trading on Fridays.

The long option holder has until Saturday morning to exercise.  Many times, a news item has hit after market close on Friday that prompts holders to exercise an out of the money call or put on speculation the news will cause the stock price to move in their favor on Monday morning.  This is why large companies no longer release earnings after close on Fridays. 

[chasesfish]

@frozen

If I'm buying puts, I like a volatile stock / high option spreads with a good fundamental business.  $RKT and $FIZZ are two examples I'm currently selling puts on.

For calls, I just sell them on stuff I own a month out, then close them 3 days before, and repeat the process.   I win some, I lose some, but all in I expect I'm raising the floor on my earnings while capping the upside a little.  "Capping" is all relative since I close an option, sell a new one, and the premium offsets to an extent.

Works well for an early retiree like me.  I'll take a higher floor for a lower ceiling.

[frozen]

Thanks everyone, these posts are helping me.

I just put in another order to sell 1 covered call on Palantir at $30, 2 weeks out.


I’m thinking of selling a cash secured put on Pfizer next.

[Financial.Velociraptor]

Thanks everyone, these posts are helping me.

I just put in another order to sell 1 covered call on Palantir at $30, 2 weeks out.


I’m thinking of selling a cash secured put on Pfizer next.

@frozen - Time decay of short options is not linear.  I find you get the most time value per day around 6 weeks from expiry.

[frozen]

Thanks everyone, these posts are helping me.

I just put in another order to sell 1 covered call on Palantir at $30, 2 weeks out.


I’m thinking of selling a cash secured put on Pfizer next.

@frozen - Time decay of short options is not linear.  I find you get the most time value per day around 6 weeks from expiry.

Thanks! I was able to cancel the order since it’s the weekend. I placed a new order to sell 1 Palantir call at $30 with an expiration of May 14. My premium is $50 minus a small fee Etrade takes.

[frozen]

I entered an order today to sell 1 put for Pfizer for a May 14 $30 strike price. I see on E*TRADE it’s still listed as an open order. Does someone specifically have to buy it? Should I just cancel it?

[ChpBstrd]

@frozen - Time decay of short options is not linear.  I find you get the most time value per day around 6 weeks from expiry.

I'm splitting hairs for the sake of illustrating a point here, but technically time decay "accelerates as expiration approaches". If for example, you are selling calls to harvest time decay over the next 12 weeks, you would experience faster time decay selling three 4-week-durations than two 6-week-durations. Likewise, you'd experience faster time decay selling six 2-week durations than three 4-week durations.

https://www.optionseducation.org/advancedconcepts/theta

That said, one has arguably taken on more risk trying to win six independent bets compared to two. This is the tradeoff.

I entered an order today to sell 1 put for Pfizer for a May 14 $30 strike price. I see on E*TRADE it’s still listed as an open order. Does someone specifically have to buy it? Should I just cancel it?

I prefer not to leave options orders open overnight because first thing in the morning you'll either make the trade at an unfavorable price or won't make the trade. That's a lose-or-nothing proposition.

Your put might not have sold because the price was somewhere above the point on the bid-ask spread where a counterpart would be willing to trade. E.g. if the bid was $1 and the ask was $1.50, and you offered to sell at $1.50 like all the other sellers, there would be no buyers at that price because the highest offer was $1. The goal is to temp one of the buyers to raise their offer. For example, offer the sell the put for $1.25, meeting them in the middle.

If I'm ambivalent I'll aim a few pennies above the midpoint and let the order sit all day. Usually, the volatility is enough that my sell will go through. Other times I have to try again the next day. 

[chasesfish]

I agree with @Financial.Velociraptor regarding where the time decay is.

For my risk tolerance, I've found selling six weeks out and closing 7-15 days out is right for me.  Far enough out closing to avoid having my positions called too.  I still made money in Q1 even though the market went ripping higher

[MustacheAndaHalf]

I entered an order today to sell 1 put for Pfizer for a May 14 $30 strike price. I see on E*TRADE it’s still listed as an open order. Does someone specifically have to buy it? Should I just cancel it?

Yahoo's data shows no buyers.  That's a bit of an illusion, because in my experience as you lower the price, some HFT trader will spot it and agree to trade.
https://finance.yahoo.com/quote/PFE/options?date=1620950400&p=PFE

I lack any significant experience with options, but I know the third week of the month is the "normal" date for expirations.  That Friday will be more popular, so you might try May 21 instead of May 14.

Also note that Pfizer is a low beta company, 0.65 according to Yahoo Finance.  That means it doesn't move as much, so it's very unlikely to lose 1/6th of it's value ($36 -> $30).  So that's probably why there's almost no activity on puts at $30.

[frozen]

I entered an order today to sell 1 put for Pfizer for a May 14 $30 strike price. I see on E*TRADE it’s still listed as an open order. Does someone specifically have to buy it? Should I just cancel it?

Yahoo's data shows no buyers.  That's a bit of an illusion, because in my experience as you lower the price, some HFT trader will spot it and agree to trade.
https://finance.yahoo.com/quote/PFE/options?date=1620950400&p=PFE

I lack any significant experience with options, but I know the third week of the month is the "normal" date for expirations.  That Friday will be more popular, so you might try May 21 instead of May 14.

Also note that Pfizer is a low beta company, 0.65 according to Yahoo Finance.  That means it doesn't move as much, so it's very unlikely to lose 1/6th of it's value ($36 -> $30).  So that's probably why there's almost no activity on puts at $30.

Really great insight here, I’m going to stick with covered calls for now, rather than dabbling in cash secured puts.