The Trouble with Covered Calls - Part 1

The Trouble with Covered Calls - Part 1

Category:

News & Politics

Tags:

• Covered
• Call
• Calls
• Married
• Put
• Safe
• Investment
• Strategy
• Kurt
• Frankenberg
• Frankenburg

[MrCFO1986]

It seems to me that this guy thinks that limiting loss is the way to go. Yes, a protective put does limit your downside, but your putting more money up. Why not do a collar if you want to do a protective put? At least at that point, you are offsetting your put cost by selling a call?

[freedomschool]

Using a collar limits your upside. In the last twelve months, I played ALTR twice; once the stock went up 17.3% and the other time it went down 21.8%. But I made money! Here's why: on the way up when ALTR gained 17.3%, I got 12% net gain from my position. Buying a put cost me a little of the profit. But it would have been a single digit profit if I had used a collar. Then, when the stock went down 21.8%, my loss was only 5.6% because of the put. I made a net profit while stock lost money overall

[Jarezev]

Why can't you just place a protective stop instead? The put will be very expensive, especially for beginners with too little money to cover the comission fees. If the puts maturity is high, and your stock gets called away, you still have to buy back the stock in order to get income out of it. At this time the stock will obviously trade at a mutch higher price than the puts exercise price. So your next position isn't really that covered. Or can you convince me to the contrary?

[freedomschool]

Also... I have no idea what you mean about stock getting called away. Buying a put gives you privileges, NOT obligations. There is never any danger of a stock being 'called away' if you own it and a put option at the same time. You only have a legal and binding contract that GUARANTEES your sell price... but you are never obligated to sell at this price if your price rises above it.

[Jarezev]

I might have misunderstood. I assumed that we at some point write a covered call to generate income. Buying gives privilages, at a cost. Selling away privilages gives you income. At some point, assuming no free lunch, I have to get rid of something in order to generate income. Buing a call in order to leverage my position, will turn to a loss in sideways moving markets. Or should you just wait for dividends?

[freedomschool]

GOOD question. I have ten separate 'Income Methods' that I use to generate income and are done nested WITHIN a trade like this. One of those methods you have already mentioned: Dividend capturing. Here's another idea... selling a bear call spread at a higher strike than the put's strike price. In many cases this results in a credit that CAN'T go against you... because for the bear call spread to turn into a liability, the stock has to go up... and you OWN it. Come to my free Webinar Tue or Thu !

[Ewilds]

A few points: selling covered calls does not eliminate market risk. If your stock drops in price and you wish to exit the trade, just buy back your calls, and sell your stock. This approach is more conservative than owning a stock outright. Also, you can sell deep in the money calls, which insures you to the downside and just receive the time value of the option as income.

[dfox3526]

The ONLY downside of covered call writing is giving up some upside in the stock and incurring short term capital gains (on the premium). That is it. If your stock tanks, the call is rendered useless. You buy it back for pennies and sell the stock. End of story. Covered call writing is a good strategy.

[dfox3526]

You seem like a nice guy, but your information is very misleading. You state that you lost all your money in a matter of 15 minutes, but what did it have to do with the calls? It sounds like you had poor stock selection which has zero to do with covered call writing. To be honest, the call helped you because it lowered your cost basis on a bad trade. The fact of the matter is that covered call writing has no more downside then someone who simply owns the same stock and doesn't sell a call.

[bobbut1234]

@khalilabualeena dude hes not an idiot hes my sensei

[joeboomer69]

"I lost my shirt, then rolled-up my shirtsleeves..." at about 2:35. You might want to have one of your students proofread your script, and then hold some cue cards for you. But, on the other hand, thanks for the info.

[psychedelicslide]

if you got a $3 premium on a $17 stock my guess is that this was a high volatility stock that you bought for the premium and not because you really wanted to own the stock....

[khalilabualeena]

@5stepsto5figures

Different option stratergies are used in different market conditions...

Covered call is a moderately bullish stratergy.. Forget it.....

a bad carpenter always blames his tools...

[5stepsto5figures]

SIgh... if you are happy with the stock, why write a call? You get called out if you were right. If you truly believe in a stock and want to see it soar, by selling a call all you do is limit your wins if you are right. And if you are wrong, shazam! You get to keep the losing stock. Hmmm... not so idiotic to make observations of truth, friend.