CFA Exam Grading

mek Wrote:
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> Just a shame that ethecs is the most illogical of
> all of the sections. That one about the covered
> call still annoys me. You can almost picture
> another (hypothetical) ethics question, where the
> angry son/daughter has discovered that their
> parent's portfolio has been restricted from the
> benefits of upside-gain.... it makes my head spin



Ethics isn't illogical. Its just that sometime we are not aware of the true picture as it should be.
By the way, in my opinion as long as the actual owner is alive the question of others(his/her sons and daughters) should not arise.
 
just because you write covered calls, you aren't restricted from all upside gains. what if your strategy was to buy stocks and write covered calls with strikes let's say 5% above the mkt price of the stock? for this let's say you gain a 6-8% yield on your stocks or so through this income stream. So if the stock goes through the roof on the upside, you cap out making 10-15% gains. If the stock stays flat, you enhance your yield and make 6-8%. If the stock goes down, you protect yourself a little on the downside. oh, did i say that the 6-8% was HPY and you probably could do this 2x a year writing an option 6 months out, letting it expire, and then repeating. i wish my mom wrote covered calls. besides the taxes on the calls that expire that are ST gains, i honestly *heart* this strategy. my head spins why more people wouldn't use simple hedges like this.
 
I guess the whole point behind that question was to understand that combining two different investments has a different impact than when looking at an investment individually....writing a call option could be quite risky, considering the possible loss..However when combined with a long stock, it becomes quite conservative, and becomes suitable in a portfolio context...
 
bannisja Wrote:
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> just because you write covered calls, you aren't
> restricted from all upside gains. what if your
> strategy was to buy stocks and write covered calls
> with strikes let's say 5% above the mkt price of
> the stock? for this let's say you gain a 6-8%
> yield on your stocks or so through this income
> stream. So if the stock goes through the roof on
> the upside, you cap out making 10-15% gains. If
> the stock stays flat, you enhance your yield and
> make 6-8%. If the stock goes down, you protect
> yourself a little on the downside. oh, did i say
> that the 6-8% was HPY and you probably could do
> this 2x a year writing an option 6 months out,
> letting it expire, and then repeating. i wish my
> mom wrote covered calls. besides the taxes on
> the calls that expire that are ST gains, i
> honestly *heart* this strategy. my head spins why
> more people wouldn't use simple hedges like this.


That's because you haven't lived through lots of different market environments. Selling covered calls on stocks works really well when stocks are going up gently without major vol. When stocks are getting clubbed, the 6-8% you get from selling the calls is small potatoes compared to the losses on the stocks. When stocks start screaming upwards it's heart-breaking to give away huge gains. The fact is that over the past few years, stocks have gone up with small vol so buying stocks but selling vol has worked great. It won't always be so.
 
I've seen a lot of comments on the covered call question. One thing I can add is that most brokerage firms allow covered calls in IRAs. It is the firms' interpretation of a Federal Reserve (?) rule on what they will allow in an IRA. And compliance allows it in an IRA then you know it is considered a conservative strategy!

The arguements about the underlying equity getting clobbered doesn't matter if you have a covered call on the position or not - its still going down. The premium from the covered call just takes the sting out of it. If that is a big concern then the focus shouldn't be on the covered call but if equities are approriate for the client.

Finally a lot of independant advisors use covered calls to peel off some income/cash from positions with large capital gains. It's a strategy that is always discussed as a way to deal with these types of situations.

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Washington DC Level I - December 07
 
Not to forget about the leverage the client would get by using covered call. Wouldn't this go against her conservative portfolio?
 
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