09-30-2013, 07:40 AM
(This post was last modified: 09-30-2013, 07:59 AM by hendi_alex.)
IMO, I've been operating over a fallacy for the past couple of years. It relates to playing defense and limiting volatility. This idea just hit me a minute ago, and is so obvious, that I'll just give myself a big 'duh'!
One of my rationalization related to call writing is that writing calls is defensive and also that is reduces portfolio volatility. And it does reduce volatility in that the portfolio rises a little less in and up market and drops a little less in a down market. I have always perceived that as a good effect, a good trait of call writing since it causes me not to get nearly so emotional during strong market movement in either direction. If I'm not overly emotional, then I'm much less likely to make so knee jerk reaction during such moves.
This morning I was was thinking about what the most desirable trait would be for my portfolio NAV. I'm thinking that answer is, [a steady pace of hitting higher highs and hitting higher lows during all stages of market expansion and contraction while at the same time beating S&P500 performance.] Especially with dividends being retained and with additional funding as well, given a long enough tracking period, the trend line should clearly show decent upward progress, characterized by both shorter term and longer term higher highs and higher lows.
My conclusion is that selling calls is self defeating in so much that they get [in the money] and then put a damper on the upward momentum of the portfolio value. The options cash flow is attractive, especially to boost income from lower yielding stocks, but I am beginning to think that the overall effect is to decrease total returns, while only providing only slight benefits as a defensive strategy and only giving the illusion of increased cash flow.
I'm seriously reviewing the extent to which I've been using my covered call strategy and will probably reduce the times and amount that such is being done.
One of my rationalization related to call writing is that writing calls is defensive and also that is reduces portfolio volatility. And it does reduce volatility in that the portfolio rises a little less in and up market and drops a little less in a down market. I have always perceived that as a good effect, a good trait of call writing since it causes me not to get nearly so emotional during strong market movement in either direction. If I'm not overly emotional, then I'm much less likely to make so knee jerk reaction during such moves.
This morning I was was thinking about what the most desirable trait would be for my portfolio NAV. I'm thinking that answer is, [a steady pace of hitting higher highs and hitting higher lows during all stages of market expansion and contraction while at the same time beating S&P500 performance.] Especially with dividends being retained and with additional funding as well, given a long enough tracking period, the trend line should clearly show decent upward progress, characterized by both shorter term and longer term higher highs and higher lows.
My conclusion is that selling calls is self defeating in so much that they get [in the money] and then put a damper on the upward momentum of the portfolio value. The options cash flow is attractive, especially to boost income from lower yielding stocks, but I am beginning to think that the overall effect is to decrease total returns, while only providing only slight benefits as a defensive strategy and only giving the illusion of increased cash flow.
I'm seriously reviewing the extent to which I've been using my covered call strategy and will probably reduce the times and amount that such is being done.
Alex