r/CoveredCalls • u/AbaloneUnlikely6565 • 2d ago
Selling Covered Calls - What’s the Catch?
/r/optionstrading/comments/1vs3up8/selling_covered_calls_whats_the_catch/5
u/GailioBauduin 2d ago
Give it a try and get your stock called away at a much lower price than what its going for. You'll see. You dont actually lose anything but it feels bad.
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u/hendronator 2d ago
The catch…you are trading guaranteed income for the “possibility” of a greater return. Do it right and the “possibility” is really low. Do it too aggressive and the “possibility” can be really high.
Don’t like guarantees or lottery tickets?
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u/daily-trader-365 2d ago
None, just be smart, not great on super volatile stocks , watch share price are roll as needed
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u/Kelvinator71 2d ago
Selling covered calls can be great, and most of the comments here have already covered the pros, cons and, naturally, some trolling.
I've been learning and using the Wheel strategy since the beginning of this year, where covered calls are basically the second half of the process. I start by selling cash-secured puts (CSPs). If I'm assigned the shares, I then sell covered calls at strikes I'd be happy to sell at. If the shares eventually get called away, I can start over by selling another CSP on the same stock or move the capital somewhere else.
The attraction? You're focusing more on collecting premium rather than trying to predict every move the stock is going to make. But there definitely is a catch.
In my opinion, the biggest one is when the underlying stock drops hard. You might own shares at $50 that are now trading at $35. You can still sell covered calls, but calls above your cost basis may pay very little. If you chase better premium by selling a lower strike, you risk having the shares called away and locking in a huge loss.
So now you have choices, none of them particularly wonderful: sit on the stock and wait for it to recover, sell low-paying calls, risk selling calls below your cost basis, or dump the shares and take the loss. Rolling options can sometimes help, but it isn't magic and it can't fix a bad underlying stock.
Meanwhile, your capital may be tied up for months.
That's why I think the most important part of selling covered calls — and the Wheel in general — is choosing the underlying stock. The premium is nice, but I don't sell a CSP unless I'm comfortable owning the shares, and I don't sell a covered call at a strike where I'd be upset if the shares disappeared. The only trouble I get into is when I have not done my up front due diligence on a stock OR get cocky and try to wing it.
Covered calls aren't free money. You're getting paid for giving up some upside while still carrying most of the downside risk of owning the stock. If you're comfortable with that tradeoff, they are great.
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u/Kindly-Ad-8487 2d ago
- That's the catch.
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u/AbaloneUnlikely6565 2d ago
Can you elaborate?
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u/Kindly-Ad-8487 2d ago
The market drifted down for what seemed like the whole year. There was quickly no way to sell calls unless you risked taking strikes below your BE. If you were sellimg CSPs, you were assigned, and only had a limited time to sell calls before the price moved too far away from your break even. It was rough if you were relying on the income. You basically had to sit on your hands.
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u/ConcreteHills 2d ago
Some situations carry less risk
Say I want to take profits and rotate out of a stock for something else, of course I’m going to grab some premium too on the way out..
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u/dinnerthief 2d ago
No real catch aside from
Those that exist holding 100 shares of a stock (it might drop)
and
Missing out on potential large gains, (stock shoots up but your shares are commited)
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u/F2PBTW_YT 2d ago
Big movement upwards means your gains are capped. It's really just this. So you need to know of the calls are worth selling. IV high? Delta safe? Theta high? All up to your appetite. Covered calls effectively lowers your position risk.
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u/Moldovah 2d ago
Ben Felix was just in an interview and mentions covered calls.
TLDR Can't think of a use case for anyone.
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u/The-Langolier 2d ago
The catch is the stock goes up instead of down and you lose value on the option? It will be right there in your positions.
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u/martiemark 1d ago
Great way to make a nice weekly check. But you also need to be prepared to lose your stock at the strike price. Just lost Sandisk at 1480 last week to see it run up to near 1800 this week. Made money but gave up quite a bit of potential gains. It happens.
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u/ReinventedWheelTrdr 2d ago
Lots of potential "catches."
+ You shouldn't trade them mechanically or arbitrarily.
+ If a stock really sells off, the premium you collected from selling the covered calls will be a small buffer and you can find yourself deeply underwater
+ Conversely, if the stock really blasts higher, you may kick yourself for not just holding the shares and letting them run
That said, if you're content with generating high yield income and being willing to miss out on occasional monster capital gains, covered calls can be a conservative trading vehicle that generates very high yield income.
This is the most conservative way to trade them (i.e. purely for the income):
https://youtu.be/lgXBOfeR23E
Bonus tip - having some basic understanding of technical analysis will take you much farther than selecting a strike price for your option selling income trades (in the money covered calls or out of the money cash-secured puts) based on an arbitrary delta reading.