Binary Event

Traders are probably reluctant to carry large positions into the long weekend and for good reason. Europe will be trading on Monday even though our markets will be closed. There is potential for a very large gap when we return on Tuesday either way. My best guess is that Europe trades just fine.

While I am positioned long, I made some sales yesterday of stocks I bought when the market was melting down earlier in the week. In addition, I sold some covered calls. No matter what happens when we return on Tuesday I will be able to manage.

Today is a tough call as it is the last day of the month and there is no business like monkey business. There is a little more call buying than I would like to see given that the market is trading slightly lower. I am signing off for the weekend unless something big happens between now and the close. Have a great weekend.


Anonymous said...

You too have great weekend!!

I have question to ask you, when you write covered call, how do you hedge your position, assume if it goes down? as we cannot sell due to covered call option. please share your idea

PJ said...

Anon - If you really want to hedge a covered call position without unwinding it, buy a put. The stock+covered call is equivalent to selling a put. So buying a put at a different strike creates a "spread," consisting of a short-put + long-put. This is a lower-risk position. Read up on spreads and other option strategies.

Normally, however, with a covered call you're committed to owning the stock if it falls. It is a moderately bullish position.

Tsachy Mishal said...

Just because you sell covered calls it does not mean you are stuck in the position. You can always buy those calls back.

Selling covered calls protects against small and medium sized drops.For instance, lets say I sell call on the SPY that are 2% out of the money and I receive 1.5% for this.

My maximum gain between now and expiration is 3.5%, whether the market is up 2% or 10%.

If the market does nothing I make 1.5%. If the market is down 1.5% I break even. If the market is down 3% I am down 1.5%. However, if the market is down 10% I am down 8.5%.

Selling covered calls can soften the blow if the loss is small but when the market loses 10% it does not help much.

That said, if the market was down 5% and I decided I wanted out, i would probably be able to buy back the calls for next to nothing which would put me at a loss of 3.5%.

Anonymous said...

Thanks PJ, Mishal

Today I got why Mishal update us about his covered call hedging trades. Very useful info. I believe with deep-in-money covered call strategy and long put, possibly we may have consistent profits always. I believe may not lose money if we follow strategy correctly.
I will apply to my trades.