sweetandsour wrote: ↑28 Aug 2023, 09:41
Mr Piper, what position(s) do you currently have? Are you still selling calls for PFE and BP?
I got to talk with Mr. Piper last week! He's another great CPS guy. He speaks Southern, so you two should understand each other.
Send him a PM with your phone number, and try to make phone contact for yourselves. He has a great story about how he learned his covered call strategy.
Mr. P knows Pharma, and follows those stocks closely.
He suggested that we look at the following stocks:
BP - British Petroleum.
NVO - Novo Nordisk. Their fat-reducing pill is a hit.
CAVA - A recent IPO. A fast-growing restaurant chain.
I suggested that we could also turn out-of-favor TGT (Target) into a cash cow with covered calls.
Mr. P's strategy is simple: Sell covered calls close to the money to get max premium. Don't fret if it gets called out; just enjoy the additional gain. Buy it back or buy another stock. Repeat every two weeks.
He likes to sell calls that pay premium of 1% of the stock price. He gets called out about every third trade or so.
He is not sophisticated in picking his stocks. If something interesting catches his eye, he might buy and trade it for a while.
===================================
It turns out that premium of 1% has a typical delta of .3, and thus about a 30% chance of getting called out. So his experience follows theory quite well.
If you can get 1% premium at delta less than .3, that's great.
If you can get delta = .3 with greater than 1% premium, that's great too.
We can game the market a bit from here. If a stock and the market have enjoyed a recent run-up, we can sell calls closer to the money for more premium, and likely avoid a severe call-out as the stock takes some time to consolidate.
If the stock is down for the period, the volatility and premium are likely up as well. We can sell calls a bit further from the trading price and still get premium as the stock recovers.
If the stock is down a lot from our purchase price and gets called out, be mindful of the wash rule and buy a different stock to trade for next month.
Advanced trick: If you want to get rid of a stock (because it has peaked its target price, or falling more than you will tolerate), sell calls that are deep in the money. You'll get paid as it falls, plus some time value premium. And just let it get called out.
As for picking stocks..... A unicorn stock has three characteristics:
1) Plenty of implied volatility. More implied volatility means more premium. Also more space between current trading price and strike price.
Market I.V. on SPX/VIX is currently around 0.15. So an excellent stock would have I.V. of 0.3 or more. Small cap stocks typically have more volatility.
2) Plenty of stock trading volume. 1 million shares per day or more.
3) Plenty of "open interest" on options. Open interest is the measure of option trading volume.
Blue Chip stocks are best for high volume. Lots of volume means that there is a tight spread between bid/ask prices, and a liquid market for trading. And high volume usually means that weekly options are available for more frequent trading. Lower volume stocks usually have just monthly options.
Looking at BP, compared to XLE:
Energy stocks march to the same drum. BP and XLE both have implied volatility of 0.23 today.
XLE closed at 88.18. BP closed at 36.64. Sep 8 strikes at 1% premium are pretty darn close to trading price. Delta at .3 pays about 0.5% premium.
I'd rather trade XLE if I had a large position. Fewer contracts means less commission costs.
But BP is an option if a guy has less than $8800 to invest in the underlying.
Looking at NVO:
Trading at 187.5. Implied volatility is 0.28. Bid/ask spread on options is reasonable.
Sep 8 strike at 192.5: delta = 0.28. Premium = $1.275 = 0.68%.
If a guy has $18,750 to plop down for 100 shares, this looks playable. Immediate cash of $125 premium. Looks like stock will consolidate for a while after its recent gap up (caused by FDA approval of the new fat drug). Getting called out at 192.5 would be $500 gain likely in the next month.
Looking at TGT:
Target closed at $ 123.4 today. Getting close to its target bottom of 120.
Implied volatility is 0.26.
Sep 8 strike at 126 is delta = 0.31, premium = $0.955 = 0.77%. Bid/ask is tight.
I actually like how this social loser looks for selling aggressive covered calls. I'm thinking about adding this to my IRA account next week.
I'm still not shopping there.
Looking at CAVA:
I did some reading on this company. They look to be a very promising growth stock. For example:
https://www.qsrmagazine.com/fast-casual ... -go-public
Trading at 42. Volume is right at 1 million shares/day. Only monthly options are available, so Sep 15 is the next contract date. Strikes are $5 apart.
Open interest is good and bid/ask is reasonable.
Implied volatility is a whopping 0.64!
Sep 15 strike 45 is delta = 0.30. Premium = $0.875 = 2.1%
Sep 15 strike 50 is delta = 0.11. Premium = $0.275 = 0.65%
I see support above 40.5.
I really liked this situation, so I bought 100 shares at $42 for my trading account. I sold a call at strike 50, and also a put at strike 40. (selling a put and a call at the same time, with different strikes, is called a "strangle.") I got $200 premium for my strangle.
So basically, $4200 paid for shares less $200 received for strangle = $4000. Which means that I have 100 shares at basis 40.
If the price shoots up over 50, then I will make $1000 dollars on the call out.
If the price dips below 40, then I will have 200 shares at 40.
If the price hovers between 40 and 50 (the most likely outcome), then I can sell another strangle at roughly $200. $200/$4000 = 5% per month.
Eventually, I will have either 200 shares to sell calls over or $1000 in gain.
I'm pretty happy, any way it goes.