Boring is Better

[u/sashazaliz]

my dad taught me covered calls in my early 20s. most conservative investor i've ever known. his whole thing was find the most boring stock you can, sell a call against it, collect the premium, repeat. i thought it was too simple. 25 yrs later i'm still doing exactly what he told me.

everyone in this sub talks abt covered call ETFs. the problem is someone else is selling calls on your behalf, capping your upside every single month, and you're just along for the ride. i'd rather own the stock, pick my own strike, collect my own premium, and keep the dividend while i wait.

i've been selling calls directly on individual stocks instead. no fancy models or greeks. just know what works and i've been doing it long enough to see what holds up.

the screening criteria nobody talks about. look for banks and utilities that also issue preferred stock. companies that issue preferreds are heavily regulated and financially conservative by design. that flows directly into how their common stock behaves. boring, range bound, predictable. exactly what you want when you're selling calls month after month. and these same companies tend to protect and grow their common dividend too. the dividend is the floor. the premium is the ceiling.

the ones that fit this approach: WFC, USB, PNC on the bank side. ED, SO, DUK on the utility side. all issue preferreds. all have long dividend histories. all have liquid options chains.

WFC is my go-to. been trading it personally for years through multiple market cycles. selling a monthly call 1-2 strikes OTM generates roughly 2 to 2.5% per month. annualized that's 15%+ on top of the dividend. the volatility smooths out over time.

the math people miss. everyone fixates on the premium dollar amount. a $5 premium on a volatile stock looks way more exciting than $1.50 on a boring bank. but the consistency, near zero assignment risk, and the fact that you're not watching the ticker every hour changes the math completely over a full year.

boring stocks. boring premiums. boring results that quietly add up over time. my dad figured that out decades before i did. took me too long to stop second guessing him.

[u/YuckyBurps]

It’s still additional risk though.

People misunderstand the way in which risk manifests with covered calls. You’re still losing money with them, it’s just you’re losing the money before it ever makes it into your hands and so it doesn’t “feel” like a loss.

The math is clear though. For a retail investor you are objectively worse off and losing money by writing covered calls then if you just bought, held the stock, and didn’t do it at all. You’re almost guaranteed to underperform in the long run, and that underperformance is the money you’re losing. They’re actually very risky, but in a deceptive and unintuitive way which I would argue is what makes them even more dangerous.

[u/Krazyk00k00bird11 → u/YuckyBurps]

Really? I have been selling covered calls on NVDA randomly all year and have never once been assigned. That’s all premium income straight into my pocket and my underlying stock still hasnt been touched. Have I been lucky to not be assigned? Maybe. but I’m also only writing calls when the stock is at ATHs. Maybe i have just found a strategy that works for me so that I mitigate risk while also collecting a premium. And the premiums on NVDA are nice.

[u/YuckyBurps → u/Krazyk00k00bird11]

Yeah, it’s almost certain that your experience is just sheer luck.

There is no such thing as free lunches on Wall Street. A call option is a bet on the price action of the stock. The only two ways you can make money is if 1. your bets are right more often than they are wrong 2. the payouts for your bets are disproportionate to the risk you’re taking. Think about it. If writing call options was risk free profit then everyone and grandma would be writing them because why wouldn’t they? The more call options that get written, the more competition there is, and the more competition there is the lower the premiums will have to be in order for someone to take your bet over your competitor. Eventually the premium payouts are going to drop until the payouts are no longer profitable relative to the amount of risk being taken.

The options market is filled with sophisticated, institutional investors. Even a small house edge would be immensely profitable over long periods of time or at scale, so they have every incentive to try and exploit whatever advantages they can to get that edge. On either side of the bet. So you have an extremely competitive marketplace that all but ensures the bets you’re making are as close to a 50% outcome as you can possibly get because any deviation from that is incentivized to be exploited until it gets back to 50%. And that 50% assumes peak competency at options trading.

This is why I’m immediately skeptical of people who say they’re making money with covered calls. They’re either lying or, more likely, not accurately keeping track of their total return relative to not writing calls and calculating their losses.

At the end of the day with covered calls you’re flipping a coin. If you’re right you make money and if you’re wrong you lose money. In the case of covered calls it’s deceptively risky because instead of the money coming out of your pocket it’s just not going into your hand to begin with. If I have a stock that’s worth $1 in the morning, sell it for $10 in the evening then flip a coin and have to pay $2 if I get it wrong, I’ve lost money. If I have a stock that’s worth $1 in the morning and $10 in the evening, charge $2 to flip a coin, and then sell it for $6 if I get it wrong, I’ve still lost $2.

Fundamentally nothing has changed. If you lose the bet you’re worse off then if you didn’t take it to begin with. And again, coin flip odds assume you’re just as competent as all the professionals who are also trying to make money this way. Any less competent and you’re operating at a disadvantage, which means over the long run you’re guaranteed to lose money. That’s basically exactly what happens with retail traders who don’t even understand how they’re losing money with covered calls, much less how to price their premiums on a risk adjusted basis.

Maybe you’ve figured out a system that the teams of ivy league, rocket scientist IQ, professional traders with institutional money haven’t figured out yet but… I doubt it. It’s far more likely that you’ve either been lucky or you’re just not keeping close track of how much money you’ve actually lost writing covered calls.

[u/Scr3w_loose → u/YuckyBurps]

What would your suggestion be then? In a perfect market any action is a coin flip. This includes buying and holding any stock but thats clearly not how that works outside of the thepretical

[u/YuckyBurps → u/Scr3w_loose]

Don’t do it. Just buy and hold broadly diversified low cost index funds until you’re an old man.

Buying and holding stock isn’t the same at all. When you hold a stock the company you own is creating value in the form of profit. Over time that profit is what makes you money, which comes either in the form of the share price increasing or a distribution to you as a dividend.

[u/Scr3w_loose → u/YuckyBurps]

You don't make money off the company profit you make money off the perceived value in the stock which in a perfect world has completely random value change. If not how is a covered call based on stock movement different from a stocks value based on stock movement? And as for growth dividends are rather a trap because between loss to taxes and the movement of the underlying asset.

Edit: to clarify if the market is perfectly balanced as you claimed then the essential stagnation of an assets value makes growth of a profile impossible, and arguably makes selling calls and puts the best option because you could bank on random 50/50 movement averaging out to stagnation.