Selling Covered Calls

[johnard]

This may be completely retarded. Why do you want to write call options on your stocks?

If you short OTM calls on your stock and the price does not meet the OTM strikes by expiration you get to keep the premiums. Do this every month you could make a nice income.

On the other hand if you get exercised on your OTM short calls you still make capital gains because your stock has gone up and you have collected the premium.

 

[daveyc]

If you short OTM calls on your stock and the price does not meet the OTM strikes by expiration you get to keep the premiums. Do this every month you could make a nice income.

On the other hand if you get exercised on your OTM short calls you still make capital gains because your stock has gone up and you have collected the premium.

don't kid yourself into believing that this is a way to make good income. i would urge anybody considering this ridiculous strategy to backtest their trades and see how you would have done in the past months and see how much money you would have lost. plus, as a bonus, with this strategy you are left with a basket of losing stocks while your winning stocks are breaking to newer highs but you cannot participate in the upside past the short call strike. not good.

 

[johnard]

I suppose selling OTM covered calls are bonuses for investors who are not intending to sell their shares. Obviously there is that risk if the stock suddenly became very bullish or bearish.

 

[nicknicknick]

when you sell options you gonna make sooooooooooooooooo much money...

 

[MaisieF]

Why wouldn't you? The out of the money ones die a kamikaze death on Friday. Why not short that stuff?

 

[Martinghoul]

Because it's a stupid thing to do (unless you know what you're doing)...

 

[MaisieF]

aaah..but if you *do* know what you are doing...tasty trade.

 

[Petrescu]

Writingcovered calls is not always silly. Here is my understanding. Someone please correct me if I'm wrong.

Here's when it makes sense:
You are long the stocks longterm but neutral short term and also short volitility short term. So you are long a tech stock that you think has a chance of being up 30% in a year or 2. But you think nothing will happen for the next few months. So you rent out potential gain to someone (sell call) when volitility is 90% and you think nothing will happen short term.

Here's when it doesn't make sense:
You are long stocks but have no opinion on short term movement of price or volitility. Or you are using this strategy for all your stocks. Think about it this way: there's always a risk of losing100% with stocks. So why in the world would anyone want to own stocks? Only because there's also a chance of making a huge gain. Now if you automatically cap that gain to 10%....you're ultimately buying a 100% risk for a 10% premium.

Because it's a stupid thing to do (unless you know what you're doing)...

 

[Martinghoul]

As I said, you need to know what you're doing... It's silly to apply any strategy mechanically, including covered calls. There is no free lunch.