In this topsy turvy market that has most investors staying on the sidelines, covered call writing has been a welcome strategy. Taking a portfolio of large cap stocks and collecting another stream of income as the market goes flat or down is a welcome tactic. As volatility has risen on every chance that the Euro will come to an end, it’s provided more premium by selling options. There are even a few new covered call ETFs that make the strategy available to us everyday investors.
Now meet Covered Straddle Writing! Not only do you sell a call on a stock but you also sell a put. The details on the strategy are below from the Montreal Exchange site. Chart 1 is the covered call strategy vs the iShares XIU TSX Top 60 Stocks and chart 2 is a Covered Straddle Writting strategy vs the iShares XIU TSX Top 60 Stocks. Hopefully the ETF companies come out with covered straddle products or maybe I beat them to it. 🙂
Check me out on BNN talking about it in February. David Lester on BNN
#1 COVERED CALL VS XIU
#2 COVERED STRADDLE VS XIU
A straddle involves the simultaneous purchase or sale of a close-to-the-money call and a close-to-the-money put. In order for a short straddle to be covered, the investor must hold the underlying security to cover the short call and must hold sufficient cash to meet the obligation of the short put. An uncovered short straddle is a volatility trade. The straddle writer is not focused on where the underlying security is going, only that it remains within the boundaries of a trading range established by the straddle. In the XYZ example (see Covered Straddle Writing Strategy), the straddle writer will profit if XYZ remains between $41 ($50 strike price less $9 per share in premium income) and $59 per share ($50 strike price + $9 per share in premium income). As for covered straddle writing, investors employ this strategy as a way to dollar average their way into a stock position. They do this by buying an initial position and setting cash aside to buy additional shares should the short put option be assigned. Covered straddle writing should outperform a buy and hold strategy in a bear market. However, the strategy involves ownership of an underlying security and an obligation to buy more shares of the underlying security. In a bear market, the underlying security will decline in value and so too will the value of the covered straddle. It will not decline as far or as sharply as the buy and hold strategy, but it will move in the same direction. Similarly, we would expect covered straddle writers to underperform in a strong bull market environment. The covered straddle writer is obligated to deliver the underlying security to the call buyer at a pre-determined price. In a bull market, that obligation acts as ceiling, limiting the full extent of a strong upside move.
This is from: http://www.m-x.ca/indicesmx_mpcx_en.php
