Covered Call Horror Stories

By Richard N. Croft

In the late 1990s I sold a covered call on, let’s call the security, XYZ. A “nom de plume” to protect the guilty… or innocent, depending on your point of view.

In any event, XYZ was a particularly volatile technology company trading at $21.75 per share in January 1998. I bought the shares for myself and clients and immediately sold January (1999) 22.50 calls at $4.75 per share. Looked pretty good when I entered the trade. The one year return assuming XYZ was called away, came in at 32.3%.

A much better return than the TSX composite index with significantly less risk as it turned out. To be fair, I need to qualify what I mean by less risk. Investors do not view risk in terms of volatility but rather focus on downside risk which equates to the likelihood of losing part or all of one’s initial investment. At least initially!

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Is Volatility Gone…or Just Forgotten

By Richard N. Croft

In an environment where we see sluggish growth among industrialized countries, global deflation, weak oil prices, political indecision in the US and negative interest rates, one could argue we are living in the worst of times. Add to that mix company specific events like missed earnings and questionable government regulation and we have a classic tug of war between bulls and bears. More worrisome to me is the undue influence that company specific events are having on the broader market.

I say that because one would think in such an uncertain environment that option writers would be generating well above average returns. No so much! Mainly because uncertainty in the broader markets and even among the sectors, is not being translated into higher option premiums. Leading one to ask, is volatility gone, or just forgotten?

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