Comments on: Covered Call Writing: 1-Month vs. 2-Month Expiration Dates https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/ Learn how to invest by selling stock options. Wed, 27 Nov 2013 23:32:13 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/#comment-17559 Wed, 27 Nov 2013 23:32:13 +0000 http://www.thebluecollarinvestor.com/?p=8927#comment-17559 Premium members:

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By: Alan Ellman https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/#comment-17554 Wed, 27 Nov 2013 15:31:19 +0000 http://www.thebluecollarinvestor.com/?p=8927#comment-17554 In reply to Paul.

Paul,

In my view, margin is appropriate only for more sophisticated investors with significant experience. For most retail investors, the main demographic for the BCI community, I do not advise margin accounts but rather cash accounts.

Alan

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By: Paul https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/#comment-17552 Wed, 27 Nov 2013 13:26:14 +0000 http://www.thebluecollarinvestor.com/?p=8927#comment-17552 Alan,

Do you ever use margin when purchasing stock to write CCs?

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By: Alan Ellman https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/#comment-17542 Tue, 26 Nov 2013 11:57:40 +0000 http://www.thebluecollarinvestor.com/?p=8927#comment-17542 In reply to Martin Reynolds.

Martin,

I like to roll my options when doing so meets my monthly goal which is 2-4% per month. With no upcoming ER and the price above the strike, these securities will still meet our system criteria (fundamentals change with ERs and no technical breakdown). So, if the deal is there, take it.

Waiting until the next week may mean the investment of additional capital if the price continues to increase and news over the weekend can change the pricing of the options as well. Even if the price stays the same you will have to infuse additional capital into the trade. My preference is to take advantage of a known scenario that meets system criteria than perhaps evaluate one that is different.

One less commission is a very minor factor.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/#comment-17541 Tue, 26 Nov 2013 11:47:35 +0000 http://www.thebluecollarinvestor.com/?p=8927#comment-17541 In reply to Bob.

Bob,

Yes that is a good idea but not always practical. ERs are quarterly and most report in January, April, July and October. If we eliminated stocks that report two months prior we would have too small a pool of securities to choose from. Immediately after earnings your guideline would be easier to follow and preferable.

To be in a rolling situation the strike would have to be in-the-money and our trade having maximized its monthly profit potential. Even if we allow assignment because of an upcoming ER…that’s not so bad!

Good thought.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/#comment-17540 Tue, 26 Nov 2013 11:42:15 +0000 http://www.thebluecollarinvestor.com/?p=8927#comment-17540 In reply to Doug.

Doug,

Valid points. One of the many strengths of covered call writing is the flexibility investors have to tailor it to their specific needs and risk tolerances. Some may aspire to the higher returns (“greed” may not be the best description, how about “setting higher goals”!) and put a little more time into management while others may prefer the 2-month approach as long as earnings reports don’t get in the way…one size doesn’t fit all. I have always set my goals for the highest annualuized returns but respect those who are more comfortable with the latter again avoidings ERs.

I fully agree with your statement that if commissions are an issue, an investor should seek another broker because as a cc writer we make a significant amount of trades.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/covered-call-writing-1-month-vs-2-month-expiration-dates/#comment-17536 Mon, 25 Nov 2013 21:36:08 +0000 http://www.thebluecollarinvestor.com/?p=8927#comment-17536 Offsite Q&A:

I have often read that 80% of calls that are written expire worthless, but I have never seen any evidence quoted for this figure.

Can you shine any light on this statistic?

With best regards,

Hilda from Australia
____________________

My response:

Hi Hilda,

I have seen that stat also and it is frequently quoted but it is inaccurate. 90% of options go unexercised, which is very different than expiring worthless.

Contrary to what many think, the vast majority of options do not expire worthless. The facts are as follows:

1. Approximately 10% of options are exercised
2. From 55% to 60% of option positions are closed prior to expiration
3. About 30% to 35% of options expire worthless

For covered call writers, we can frequently make excellent returns even if the option expires worthless.

Alan

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