No. of Recommendations: 26
Selling calls is ultimately a bet on the gammas/curvature of the Brk price movement. You expect brk would go up slowly, usually after a big jump. But there could be a regime change here.
Wha?
I certainly never thought that way about writings calls. I can never even remember what gamma means, and I've written over 100,000 option contracts.
To me, writing a call against your existing stock--turning a long stock position into a covered call--is just a conditional way to sell your stock.
You have a stock worth $100 and you think the valuation is getting pretty full, give or take. You decide you'd be a seller at $110. Maybe the market price will go that high, maybe it won't. Then you discover that somebody is willing to pay you $10 cash today to commit to selling to him at $110 if he should so choose in the next few months...something you would have done anyway.
So you just have to ensure you're equally happy with the two outcomes, as you don't know which one you'll get. You either get $10 cash to keep, or you sell your stock at a net exit of $120, which is above where you would have sold anyway. The key point: Both of those are good outcomes relative to not doing the deal, even if the price hits $130, because you had already decided you'd sell at $110.
For those who wrote calls earlier in the year and are regretting it because the stock has gone even higher, just go back and have a chat with your past self when you decided you'd be completely happy to be a seller at [strike + premium]. And be happy!
Jim
