Cboe Blogs

You can earn consistent double-digit returns with covered calls (on an annualized basis). In fact, the shorter-term expirations yield more, so you're better off writing several smaller premium calls per year than one or two big-dollar but lower-return strikes. A common error is picking stocks based on premium of the call. The more volatile the stock, the more implied volatility in the option and herein lies the problem. If you pick stocks just to write covered calls, you may be taking on more risk[...]

Covered calls are incredible cash cows. It is difficult to avoid double-digit returns if you focus on short-term contracts slightly out of the money. Writing several of these per year and waiting out expiration (or closing at a profit and replacing) is clearly one of the best conservative strategies. For anyone willing to accept the risk of having shares called away, covered call popularity is well deserved. However, the strategy only works well if a few smart rules are observed: Pick stocks for[...]

In uncertain markets, every investor is fearful about possible losses in a stock portfolio. But other than getting out altogether, what can you do to eliminate that ever-present risk? Here are two options strategies worth considering for portfolio management: Collar for loss prevention. The collar is a smart move when you are holding appreciated stock. Rather than risking a loss due to decline in market value, open a collar. This consists of a long out of the money put and a short out of the money[...]

Everyone has heard that writing naked or uncovered options is extremely high risk. This is not necessarily true. The covered call is risky because a stock's value can fall below the net basis (cost of stock less premium received for the call). But when it comes to the naked put, it's a different story. The way to quantify the risk is to realize that a stock's price can only fall so far. Consequently, the market risk involved with naked puts is far less than those of covered calls. You also have to[...]

What strike proximity works best for covered call writing? The answer depends on several mitigating factors: What is your basis in the underlying? If your basis is far below the strike of the call, you have to determine whether you want (A) current income while keeping the stock, or (B) a sale of the stock. If you want current income, but do not want your underlying to be called, an out-of-the-money call makes sense. If the stock price remains below the strike, you will not be exercised and once[...]

Many options traders view the covered call as a safe strategy. But are they right? The combination of premium income, dividend, and capital gains is quite appealing, without doubt. Selecting the right contract yields double-digit annualized returns. But there are risks. The covered call is not a risk-free strategy, so anyone going into one should be aware of what they face. Here are some points to keep in mind: Downside risk. The covered call provides limited downside protection because the call's[...]

Can options work in a conservative way and actually help protect your portfolio? Most conservative investors traditionally have seen options as high-risk, speculative plays on short-term market swings. This is understandable when you think of the many high-risk option strategies available. But increasingly, options are going mainstream as even the most risk-averse investors are finding ways to use option contracts to lower risks and protect their long stock positions. Three basic ways this is accomplished: [...]

The curiously-named "iron butterfly" is a complex strategy offering limited losses and limited profits. It is an expanded version of the basic butterfly (two separate spreads offsetting one another). The "iron" version is a combined straddle consisting of four options instead of the butterfly's three. An iron butterfly can be either long or short. The long version consists of a long call and long put at the same strike; and a lower-strike short put plus higher-strike short call.[...]

A delta neutral trade is one in which a long and short option contain offsetting delta so that the net delta is at or near zero. Delta is a measurement of the degree in an option's price movement when the underlying moves. The theme of delta neutrality can refer to many differently constructed strategies including spreads (covered and uncovered) and straddles. When an option position is covered with long stock (one short call offsetting 100 shares of stock), the delta neutrality creates an equivalent[...]

The collar can be expanded to create a truly creative variety. The traditional collar (own 100 shares, sell 1 covered call, and buy 1 put) can be turned into a long-term protective version: buy 100 shares sell one very short-term covered call, maximizing annualized income as the result of time decay, picking a strike higher than the cost of your stock buy one long-term put (8-10 months) This accomplishes a relatively high rate of return without the need to replace the put. The short call expires[...]

When writing covered calls, it's important to accurately compare one expiration to another, to make certain that your analysis is accurate based on both rate and time. You can compare annualized returns under the following guidelines: Make all yield comparisons to the strike. Use the strike for consistency, based on the rationale that if exercised, the strike will be the price at which you sell shares. Alternatives are to base the analysis on your stock basis or current price, but both of these[...]

Using options to focus more on either uptrend or downtrend is an effective method for augmenting the swing itself. The strategy assumes that you have an opinion about the prevailing direction of movement in the underlying, and that momentum confirms your opinion. So as a starting point, you can coordinate a weighting decision by checking some of the best momentum oscillators like RSI or MACD. There are numerous methods for weighting one side or the other. On the bottom of the swing, bullish weighting[...]