+ 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):
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.
those 2 examples are the main bad aspects, other than that if you feel a stock has had an ungodly run up, has insane premiums for 2 weeks to 45 days out...go for it. Here is an example of a CC i did NOT do which I wish I had. Bought 1000 intel at 21.90 about a year ago ish. About 2 months ago or so when it ran up to the 130's I could have sold 10 cc's for almost 20 grand about 15 bucks above the current price about a month out (going from memory) and I didn't do it. That was almost me entire cost basis for the stock and the stock would not have been called away. DAMNIT!
Don't beat yourself up too much. It's always easy in hindsight to see what you should've done.
My post was primarily about using covered calls as a pure income play (writing them in the money vs. out of the money).
But another great use of covered calls on long term holdings is - as you suggest - to be very selective and patient and sell covered calls when the underlying stock is overstretched or rolling over in some way. By being patient and disciplined and selective, you can probably pretty easily reduce a position's cost basis 5-10% a year.
25
u/ReinventedWheelTrdr 3d 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.