Less Common Adjustments for Covered Call Writers

Mark, One question: How about covered calls or naked puts; is there any other usable adjustment method besides rolling down or closing position?

Robert

As you know, these are equivalent positions, so I’ll answer as if you were asking only about covered call writing (CCW). Reason: It’s a far more popular strategy, although I urge covered call writers to consider writing cash-secured puts instead.

Each of these trades is equivalent to being short a put.

As an adjustment, consider these alternatives:

    a) buy a further OTM put to limit losses
    b) buy a longer term put to move into a calendar spread
    c) buy a closer to the money put to own a bearish position – changing your outlook
    d) Target bigger profits with added risk (I hope you don’t choose this) by selling a call, and going short a naked strangle or straddle
    e) Short some stock to own a delta neutral position

No single one is better than another. It all depends on how you want to ‘play.’ If you want positive theta, that limits your choices. If you are very conservative, that very much limits your choices and adopting this strategy was not the best initial trade for you. If very aggressive, you have different choices, with added risk.

But it is easier to just quit a winning (enough profit) or losing (enough pain) trade and open another. If you open that new trade in the same stock then you would be rolling. If a different stock, well then, it’s obviously just a new trade.

Don’t look for complications where there are none. If you don’t like a position, it is often best to exit.

Personally, I prefer the roll for the CC or NP position. Unless I am no longer bullish on this stock. I bring in more cash by moving the option to a lower strike and more distant month. Let me rephrase that. It’s what I used to do. I no longer sell naked options.

986

2 Responses to Less Common Adjustments for Covered Call Writers

  1. Tiger 06/13/2011 at 9:05 AM #

    I am a freqent seller of naked puts, usually in layers at various strikes, various months. One tactic to hedge is to buy a vertical put spread further out. This reduces my overall positive delta. It doesn’t help that much in a worst case crash scenarios, but it helps a great deal when market conditions don’t involve a major crash. It tends to stay positive theta, though reducing theta.

    As time goes on, if the vertical doesn’t come into the money zone, I often lift the long put leg and leave the sold put.

    • Mark D Wolfinger 06/13/2011 at 9:58 AM #

      Tiger,

      A very interesting approach. I’m pleased it works for you, but it feels too risky for the methods I teach.

      I’d prefer to own put spreads closer in than further out.
      I’d also never lift the long leg when it results in a position with twice as many naked puts.

      Don’t misunderstand – I suspect your methods produce profits, and that is the bottom line for most traders. However, I don’t want to risk oblivion should a black swan event occur, and I’m willing to take less profit and less risk.

      Thanks for sharing