Friday, February 2, 2007

Selling Shorter Term Calls

If you read the Bit of History post you'd know that I started off selling front month call options. After a lengthy discussion with the folks at Systematic Covered Writing I switched to selling longer term call options. The main reason was to get more downside protection and generate more income up front. Making this change reduced my risk and had little to no affect on my average monthly returns (i.e. I've still maintained 2% average monthly return).

I took this a step farther and also sold longer term calls when rolling out the call options. Again, the purpose was to generate more cash up front. However, I recently modified my strategy to use shorter term calls when rolling. The reason is to generate more income in the long run rather than at the present time. I still sell longer term calls for the initial position, which provides the initial downside protection I require, but may sell shorter term calls if the initial call expires.

I basically compare the front month premium to the premium in further out months. If the front month call is selling for $1.00, I would require the two month call to sell for $2.00, and the three month call to sell for $3.00, etc.

For example, if I can get $1.00 for the one month or $1.50 for two months or $5.00 for six months. I’d sell the one month since it’s the better return. However, if the six month was $6.00 or higher I might sell that one instead, since it’s the same return but more income now.

While chatting with the folks at SysCW the other day, I learned that they also made a similar change and they provided me with a link to their Revised Recovery Strategy.

By using a combination of longer term calls on the initial position and shorter term calls, if the initial calls expire, I hope to improve my overall return.