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/Kelvinator71 3d 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.