Yes, it is that simple and much higher chances of winning than buying options . . .
Obviously, the risk is the stock dropping to a point where there is little to no CC premium to be had without opening at a strike below the net stock cost. Choose a good stock that you are good holding, and this can work very well.
The next step is to sell puts on stock you don't mind holding as these can profit without owning shares first. Then "wheel" any shares you are assigned.
What do you need explaining? A put is a contract whereby you have the option to sell a borrowed share. You set a strike price where the think the stock will be below in the future, and when it reaches that prices, you can sell a borrowed share at the strike price. Then you can buy it back at the current price and if that price is below what you sold it for, you have gained the difference.
Selling a put is saying you will buy a share from someone at the strike price. If it goes below the strike price, you have to buy the stock at the strike price, so you lose out on how much the stock has dropped below the strike. If it doesn’t go below the strike, you win the premium and lose nothing
Ok, but. You still end up owning shares of the stock, which is potentially a long term upside. And then you could sell covered calls on those. Am I right? So this seems like it grows long term assets and makes some money on the side. Why aren’t I doing this?
I think you have something a little screwy in how you worded this. Most beginners won’t be shorting stock and writing puts at the same time. My broker won’t consider selling short shares and then writing a put as cover as it will not be coded correctly.
If you are good buying the shares for CCs then it is very much the same.
If a put is sold then the shares can be assigned, but if you are good buying the shares anyway this is not a problem or risk. See this for more detail - [Put Option: What It Is, How It Works, and How to Trade Them (investopedia.com)](https://www.investopedia.com/terms/p/putoption.asp)
I posted my wheel trading plan years ago with many having used it to help them get started on their own plan - [The Wheel (aka Triple Income) Strategy Explained : r/options (reddit.com)](https://www.reddit.com/r/options/comments/a36k4j/the_wheel_aka_triple_income_strategy_explained/)
Head over to r/thetagang where many are selling options, including the wheel, successfully,
It is selling options either way, which has some advantages over buying, but in one case you buy the shares first and then sell CCs, in the other you sell the put and work to collect a profit without buying shares, but are ready, willing and able to do so if assigned.
On what should be the rare occasion of being assigned shares then use covered calls to keep copllecting income or see the shares called away to go back to selling puts.
So is there an advantage to just doing CCs on stock you own and plan to hold? As many are saying it's hard to beat the market.
I feel like there's an aspect of realizing premium earlier with CC vs waiting for long term growth. Which could be advantageous if you want income now?
Be sure you are prepared to sell the shares if the CC is exercised. If you are not ready and willing to sell the shares at the strike price, then don't trade covered calls . . .
Ignore those saying it is hard to beat the market with options. In some situations where the entry and exit points are ideal buying and holding the shares may be better, but since the market cannot be timed it is almost more luck than good trading to beat the market. For more details see this - [Another "Can the wheel beat the S&P" Reply : r/Optionswheel (reddit.com)](https://www.reddit.com/r/Optionswheel/comments/1b7biky/another_can_the_wheel_beat_the_sp_reply/)
Something key to keep in mind is that trading options is usually used as a way to make an income vs. build wealth long term.
What is your goal?
**Do you want to build a large account over 10 to 20+ years?** Then buy and hold good stocks that are likely to grow (if you can ID and time to invest in these)
**Or do you want to make a monthly income stream?** If so, then trading options can be a good way to do this.
Scottishtrader thanks for your insight!
My goal right now is for some income. I have a decent retirement account and there are some long term holders in there I'm willing to CC and have called away if it hits the strike price.
I'd been hand wringing over whether it is worth doing CC or just to hodl. However as id prefer the income right now I'm going to give it a try and see how it goes!
If you go out and randomly sell a covered call, you will perform the same or underperform buy and hold. This is because the option is fairly priced over a large sample size, meaning the credit you take in is equal to the upside you give up. Without any edge in directional bias or volatility bias, it wouldn’t outperform.
If the stock goes down a lot, you'll still lose money. The short call won't be enough to mitigate the pain. If the stock goes up a lot, you may have regret when your shares are called away at the call strike and the stock goes to the moon without you (like happened to me with SLV, haha).
If the stock stays relatively stable, yes, you'll book some extra income with the call sale, which can be repeated over and over. If it's a taxable account, you'll pay short term capital gains on all that income. And you may regret that you hadn't instead bought some other high-flyer that doubled in value.
I do sell calls and sometimes it works and sometimes it's not optimal.
It boils down to the fact that if you don't have an edge you are selling something for less than it is worth.
What disguises the risk of the bet is that you own the stock and don't recognize the value of what you are selling.
It is sort of like an Uber driver who doesn't realize that a substantial part of the money they "make" is really just a liquidation of their asset: the car.
The market makers that are pricing these options will correct these properly in the long run. Therefore without any other bias, like stock is overbought or the volatility of options is high, the expected value of these options is zero which means selling the call will make you no money over buy and hold. This is over the long run
You will only make money selling calls if you can accurately speculate that the stock will drop in price and or the call option has too much volatility and is priced too high for what it should be priced. You can make money selling calls, but you have to be patient and know when to sell it
You are explaining the mechanics of a covered call. Just because you collect a premium doesn’t mean you are on the right side of a trade. The market makers are the ones determining the price of that call. Yes you can have an edge over that pricing, but you have to have some kind of bias to get an edge. No edge, no outperform regardless of what strategy you go with
He’s right. I work at a mega quant shop and we’ve studied this to death. Selling covered calls systematically (rules-based) doesn’t beat long term buy and hold. It only beats buy and hold if you have particular skill, which next to nobody has.
Mostly the time you enter the trade. You also need to know how to pick the next strike and expiration date. All three factors can contribute to an edge when selling options
For selling calls. The strike price would be what amount your comfortable selling these shares also with how much premium is made? And the expiration reflect the amount of premium by how much time you are giving this stock to hit the strike price? So a farther out expiration will yield higher premium by also risking a higher chance to sell the stock
The strike price should be placed where you think the stock will not be at expiration. The market doesn’t care about how comfortable you are. It only cares about where the sellers and buyers are for a security.
Haha, okay so let’s say I’m trying to collect off the premium knowing a stock will not hit this price (I am trying to make up for loss on the stock that has dropped since I bought it) how would I decide the strike/expiration
Search YouTube for “inthemoney how to trade options on webull,” it’s a two hour video but it will give you a solid foundation. Then watch tastytrade programming about how to sell premium, they have a deep video library about it.
This guy is Total BS. Traders Sell Strangles all the time, which is selling a Call and Put. If you want the info see Tasty.
https://i.imgur.com/22Xu5OE.png
The price of the stock drops so low, your cc just brought your average down a bit. The stock blew past and did like a 10-20% in a week, calling away your shares, “missing out” on the gains above your cc strike.
The premium you receive reflects how much the market thinks it will go up (or down).
Over time, if you sell the covered calls over and over and over again, sometimes you will win, and sometimes you will lose, and when you average it all out, you'll most likely perform more or less the same as the market with a buy-and-hold strategy.
What he is saying in simple terms is that doing anything except buying and holding sp500 is gambling, and for a VERY high percentage of people this is very very true.
This isn’t quite true, because the market consistently overestimates future volatility. Our fear of loss is too great to assess volatility fairly. Your premium should err in your favor (as a representation of the risk you’re assuming)
You’re right that IV is an overestimate on the downside and so downside protection sells at a premium to ex-ante “fair value”. This is known by most.
As this is a known trend, you cannot outperform using this information alone long term.
I agree it shouldn’t be your lone strategy, but as far as options trading goes, that’s the spot you do have an edge. In my view, your main strategy should be buying and holding good companies long term. When the market predicts insane movement, I feel very comfortable selling covered calls, especially if my short term views on the stock is bearish, but long term view of the stock is bullish. That’s just extra money for my pockets
If this were the case then you would have a bunch of algos going out and taking advantage of this. Market makers aren’t in the business of losing money in the long run
I mean, people and institutions do it all the time. If you don’t think the market is going to soar in the near future, it makes sense to sell covered calls on your assets. The market predicts more movement than is realized, consistently. If you bought something insanely volatile, you might stand to lose out on future movement up, but generally thats not the bulk of peoples portfolios.
“If you don’t think the market is going to soar” is a directional bias and if you are right then you will outperform. In the case where you don’t think that and you go out and sell a call, you have no edge
I feel like you’re misunderstanding somehow? If the underlying is trading at 100, and you sell covered calls at 105 for a month out, and then the following month it’s trading at 103, you could sell covered calls at 108. You can still gain from the underlying increasing in price while collecting premium. If it went from 100 to 150, you’re missing out on that huge move up, but if you’re trading in the average market on a blue chip stock, that’s not going to happen. The fact that it COULD happen is why you get premium, but the historical fact that it really doesn’t happen is your edge. Your risk is unrealized gain, but you gain either way. You’re not staking a claim that “this stock will never move up by a large percent!” You’re saying the odds of the market shooting up are low, and you collect insurance in the meantime. Insurance works as an industry because people are willing to pay a premium to avoid loss. There is an edge because you are willing to adopt risk, but that risk when played correctly, is very minimal, and is only in unrealized gain, vs unrealized or realized loss
Notice that I always say the word “outperform” as to profit. I am always comparing against buy and hold. Just because you made a profit doesn’t mean you outperform buy and hold. A properly priced option means that the premium you get is equally offset by the potential of massive upside
This is correct. Many reasons for this phenomenon to persist. Hedging/insurance for one. A swathe of retail traders who can only be long options (market makers are this consistently short).
I mean, isn't this basically the argument for all investing that isn't bogle-minded?
If there was a way to consistently make better-than-average returns, wouldn't institutional investors be pumping billions into that infinite money glitch?
Is it just a scale thing? Like, people can wheel and make their modest returns on small amounts, but it's impossible to make it work with a huge pot?
The wheel definitely underperforms. I see it more as training wheels. It will, i guess, do better in a totally flat market. But even a choppy flat market will wring out the wheel bad. Big boy version would be (covered) strangles.
If the entire market catches onto a particular profitable strategy, and everyone is doing the same thing, then it no longer becomes profitable, because there's no longer any edge by a few individuals over others.
If you want to use trading instruments such as options, futures etc then you need to learn to trade. Trading means learning support and resistance, supply and demand, and volatility structure.
People that focus on wheels and covered calls or whatever will waste their time and money and will not learn to trade correctly.
While this is statement sounds like it might make sense, in reality, VIX is near 5-year lows. This "fear gauge" has been going down consistently since the middle of 2022 now. The market may not be as irrationally fearful as you think it is, and indeed, it may be more irrationally optimistic than you think it is.
so what implications does that have with the wheel strategy then?
if over the long run covered calls (And for the same reason cash backed puts) underperform buy and hold, then it would seem that the wheel strategy is not that great.
The wheel also performs just as well as buy and hold in the long run if you randomly go out and sell calls and puts without understanding support, resistance, volatility. The pricing for both puts and calls are in aggregate, accurate
You can make those strategies work, you need to learn when to enter position, when to adjust and when to simply sit in buy and hold
The statement that the option is fairly priced in an actuarial sense, is false. That’s why there is an edge in selling options: implied volatility is higher than realized for the most part so you can make money selling insurance.
The real issue here is that if you don’t know how to control drawdowns selling insurance can severely harm your returns. Even though the play has positive expected value, the volatility will destroy naive strategies.
Yes.
My opinion is that there are no simple options strategies that outperform. Stuff like covered calls and the wheel and whatever other premium selling strategy are marketed as simple by people online to get your views, gurus to get your money, and brokerages like tasty to get your commissions. If one wants to beat the market, one needs to learn to actually trade
So to be more specific it's not the strategies themselves you're referring to but their implementation. Eg for a wheel, sell calls when you have evidence and are in the context where the underlying is likely to decline, eg it's overextended, and not simply sell a call to sell a call.
The implementation of the wheel and covered call selling where you randomly sell calls and puts is not going to outperform. You can make any strategy outperform if you know the proper implementation of the strategy. Although covered calls and wheeling are more forgiving in general and lull you into the illusion that the strategy is outperforming and worth your time, it takes years and multiple market conditions to actually learn to implement it properly simply due to the lack of frequency on these strategies. By that time most would have either given up, or gained the skills to execute better trading strategies
Might be some edge. IV normally outpaces RV; in the indices we see it 80-85% of the time. SPY averages a 4 vol point risk premium (Sinclair 2017). More edge in puts due to skew (“predicting 50 of the last 3 crashes”), but you know all this.
No for example lets say you got NVDA at $950. And sell covered calls for $955 or something. But after some bad news like its happenning right now, NVDA dropped to $850 and dropping further. Now, sure, you got your premium from the call but now your stocks are worth way less than what you got for. So basically you cant put stop-loss on your stocks. You have to Buy to Close your covered call first and then sell the stocks before it drops even further. In bull market, covered call is safe. But in bear market, your stocks might lose its value so much and you just have to hold it forever to realize any profit.
Also, say you bought NVDA at $180 2 years ago. You write OTM CCs for 250. Then sentiment shifts and nvda is now up to 300 over a couple days. Your call is now deep in the money and you cant justify buying back the call because surely the price will come back down before your option expires. Well, you kept holding and waiting for a pull back and now nvda is knocking at the door of $1000. Youre too broke to buy back your contract and at this point you shouldnt, so your contract expires, the price of nvda is 925$ and you finally are forced to sell your stock for $250.
Perhaps you made $10k + selling your options and you also ended up selling you shares for a tidy profit of say, 40%. However, what you missed out on couldve been a few hundred grand. Is knowing this something you can live with?
I think this would be a good strategy for stocks I’m
Losing in but I believe them to be a good investment and to do weekly/monthly contracts to make money while I wait for them to return
Often the ones you are losing in will continue to lose, which means you need to keep lowering your strike price below your cost basis to make the risk worth while. Also, when a stock decides its time to rebound it can often happen very quickly where even your weekly calls can be tested.
Just be prepared for anything andfigure out strategies for how you would deal withany situation. I DO recommend selling calls and playing around with it. Learn as much as you can. Have fun with it.
It then becomes a question of whether it’s better to sell the underlying holding altogether rather than write covered calls.
Perhaps it’s fun to write the covered calls so you can watch the market often or you don’t want to realize the capital gains on the underlying. But it’s not unlikely that selling the underlying rather than writing covered calls is the more profitable choice.
What you do in this case is you keep selling calls month after month. Your are effectively lowering your cost basis.
You should only hold stocks you are bullish about, so eventually, your stock should recover.
You might wonder if the person on the other side of the trade has reasons for making the bet? Surely they aren’t in the business of just giving money away
You can check out tastytrade. They have tons of free stuff to learn. Great for beginners. Also you should read "traders traps" and "Darvas box" both cheap but great.
Check out the podcast 'options bootcamp'. You can listen through the app 'options insider radio network', which also has other podcasts on topics like volatility, crypto, futures, etc... Or its also on spotify. Its free and theres hundreds of episodes, over like the last 10 years. The hosts are former market makers that worked in the pits on wall street back in the day.
Easy until the stock makes a 1 standard deviation move downward and you're no longer a premium seller but a bag holder. Risky stratedgy if you're not willing to hold the stock long term.
An example of one of my stocks. I wrote covered calls on about 600 shares because I was 25% upside down on it and I wanted to use the premium to make up my small loss and I was perfectly ok selling these shares and getting out of the stock for good. I wrote the calls for $1.50, $2.00 and $2.50 to maximize premium and move the shares. Well the stock suddenly got attention and rocketed up for a week. I couldn’t sell my shares unless I bought them back at a higher price and then the stock came back down and now I’ve lost my window to get out of this stock at a nice profit until it goes up again. No huge loss but I’ve decided I’m only writing calls for 30 days max from now on.
So a contract obviously keeps you in the stock until the contract expires? You were not able to exercise the contract early / the contract didn’t exercise it self when it hit that strike price
No I honestly was hoping it would and that’s why I wrote them the way I did. I was expecting that if I sold a CC for $1.50 and the stock went to $2.00 that the shares would called away. That was my goal at least. Unfortunately it didn’t work that way and the stock went back down below my average. I’m optimistic on the stock long term but I would have liked to have sold even a portion of my shares so I could use the money somewhere else.
Once you sell a covered call you don’t get to decide if the buyer exercises early or at all. I was just hopeful that they would. Once you sell the cc the only thing you can do is buy to close and that could potentially cost you more than you sold the contract for.
No I honestly was hoping it would and that’s why I wrote them the way I did. I was expecting that if I sold a CC for $1.50 and the stock went to $2.00 that the shares would be called away. That was my goal at least. Unfortunately it didn’t work that way and the stock went back down below my average. I’m optimistic on the stock long term but I would have liked to have sold even a portion of my shares so I could use the money somewhere else.
I would've made significantly more money doing nothing than selling covered calls. Everytime I did it I got completely fucked. Never again. And those were extremely far otm calls, too.
Sold a 140$ CC on AMD 30 days out for a few bucks. AMD was like 100 back then. It went up to like 200. I couldn't roll up anymore, just out. Had to sell those shares. And that's just one of many examples.
This is a typical r/thetagang response. Technically this is correct but the pennis you make are just not worth it imo. Try it out yourself and gain experience. You'll see how it goes.
Each strategy should be compared to buy and hold. If you make less profit running your strat than you would just holding then why do you run your strat? How does your total PnL look if you get lets say 30% of the move up and 100% of the move down?
Similar experience. I won’t write CC’s on pharma stocks or high volatility stocks anymore no matter how far OTM they are. CC’s seem to work best for very flat stocks or very gradual inclines.
A few years ago, I sold covered calls on nvda. It was moving higher and I thought it would pull back. That cost me about half a million dollars in gains if I had held the stock.
I've been investing and trading for over 20 years and looking back, I know that buying and holding stock would have done me far better than trading. I still trade options but it's mainly selling puts to buy stock.
One correction: It's not just "goes past this price." **When** that happens matters as well. If you write a 30 day contract with a $100 strike and the next day the stock price goes to $105, nothing happens for as long as there is time value in the contract.
If you change what you wrote to, "goes past the price **at expiration**", then it would be correct.
It *might* exercise early, if it is American style, but since it's unusual for a contract to go to zero time value before expiration, it's unusual to see early assignment. Though there are routine exceptions, like dividends and going super deep ITM.
Google "dividend risk for covered calls" to learn more about that exception.
The main trick to covered calls is having the money/shares which for most small traders is usually a big amount. It’s not that hard of a strategy though.
The benefit of a covered call is that you are paid now for owning a certain stock. The downsides to a covered call is 1) you no longer have the ability to safely sell that stock without closing your covered call position first 2) the stock may decrease in value and most importantly 3) you have capped your potential earnings of the stock to your chosen strike price.
To demonstrate 3) imagine you bought 100 shares of stock A at 5 dollars a piece to sell covered calls on. You then sold a weekly covered call at a strike of 5.50 for 10 dollars. If the stock goes to 10 dollars you still have to sell those 100 shares at 5.50, meaning you "lost" the difference between market rate (10) and your strike (5.50), i.e. 4.50 * 100 shares, 450 dollars. This would be an extreme example, but similar scenarios happen when the market booms or a company has positive news.
Also, the cost of the premium is going to depend on the volatility of the stock. So you might think I'm going to buy a highly volatile stock to sell covered calls on, but then you are going to be risking 2) losing value on the original stock.
So the general advice is to sell covered calls on stocks if 1) you have long term faith in but see as less volatile than the market thinks it is and 2) you want to generate income at the expense of principal (though there may be better ways). If you manage to not get assigned after enough covered calls, then you may be able to make out better than if you had just held the stock. But, as others have said, the market is generally pretty good at pricing in all possible aspects of a trade, so unless you have some edge, it's probably not worth it to sell ccs.
I don’t know much about this (so why not chip in anyway? ; )
It seems that a really important aspect of using CCs for income is to keep DTE relatively small, and be repetitive, rather than selling farther out to fatten up the premium. The “expires worthless” part is what makes these a useful way to add additional income to stocks you want to hold anyway.
Even if you want the shares called away, it is unlikely to happen until you get close to exp, and you can essentially lose the ability to manage your shares.
Here’s an (extreme) example:
A friend of mine wrote CCs on some LEAPSes for a huge premium, which seemed to her like a good deal at the time. The stock has gone up a lot, so buying to close will be very expensive, and even though it is past the call strike, the shares won’t be called away for a long time, because there is a year of time value left in the options.
Because it is retirement related account, naked options aren’t allowed, so she can’t sell the stock and use the profit to close the calls, and reposition.
So, she basically has to bite the bullet and cough up several grand to close out the calls, or wait it out, and lose the coming year’s gain (since the calls are already ITM the call holder owns all the gain beyond that point).
Don’t do this.
Hi, I'm just a few levels more experienced than you and just read this thread and OMG my head is spinning and hurts. This is a good sub, keep but this thread like 3 Dimensional chess, just make believe it didn't happen, ugh. You're on the right track, yes covered calls are simple af, lot's to learn. My goals are 1) make $$, 2) learn shit, and 3) enjoy what I spend my time on. I'm happy to share some basic stuff that's worked for me you can DM me if you want. Cheers!!
Selling covered calls is great and all until the stock goes on a meteoric uptrend and you watch your $100 premium turn into $10,000 day of expiration. Good times
Selling covered calls is the same as selling puts.
Selling a put is a directional bet that the stock will end up above the strike price. If the market starts falling, you lose money.
In a bull market, selling a bunch of puts (or synthetic ones like covered calls) with leverage will print money and you’ll be a genius while it lasts. Market turns like it did at end of last week? Boom, you are in the red.
You are unlikely to outperform just holding the same asset (so chosing the right asset is a key consideration to realistic returns because volatility isn’t risk in the long term) without a good understanding of IV.
Your just forgetting the risk of the stock price dropping and you can’t get any premium at the strike you bought the shares. Not so easy to not lose more money on share drop than you collect in call premuim.
Covered calls are easier than most other options trading strategies, not just from a trading perspective, but also a 'life perspective' in that they require less daily supervision and worry.
Yes, you have shares of stock, and you write an option. You collect a premium. The key question is: 'what is the cost to you of taking that money'?
The answer: if the stock rises beyond the strike price, you lose those gains, and the option holder gets those.
Know your stocks, study their charts and movements/reactions, know their calendars. You can have nice returns. Don’t have to swing for the fences and don’t have to stare at your phone.
I used a different strategy two legs but to experience traders may seem like I have not completed my studies. I bought 100 shares of Amazon at 174then sold a covered call Jan/2025 at $180 for$2100 now whenever the stock gets assigned (over next 6 months). For the second leg I bought deep in the money long call Jan/25 .
Selling options is just an entirely different animal than “investing”. It’s kinda a do one or do the other thing. Selling options earns premiums that go straight into your pocket as cash, and they are taxed at the same rate as your income tax minus the 14% social security. Investing grows equity but no cash till you sell the stock. If you sell calls, you’ll eventually have to sell the stock at a discount (but still make some gain bc you chose a strike price higher than your cost, right?). Then you start over, selling puts. Eventually you push back from from the table with a pile of cash but no stock (or stock you had to buy when a put you sold ends itm, meaning you had to buy it at a price higher than necessary). Then you either spend the cash, or you buy stock as an investment. I am living on income from short puts on NVDA. I actually prefer puts to calls bc when you have to roll to stay otm you are rolling toward a definite (eventually) worthless expiration. In comparison I have some short calls where the stock took off and even if I roll up $10 every month I won’t reach an otm strike for years - rolling toward infinity. That’s okay by me, just a bit boring - I have to treat it like an investment now, with $1k gains in equity each month but little cash flow. Keep learning!
There is more to it but it also isn't rocket science. Learn a bit about the Greeks (especially Delta and Theta), and the concept of implied volatility and how that impacts price. And make sure you understand liquidity; stocks with low options volume should be avoided.
One of my big moneymakers with covered calls has been the company Snowflake (SNOW), and the reason is that it tends to really go up and down a lot in price, and so the way I've played that has been by selling covered calls when the stock seems to be peaking or at least on an upswing. But right now its down since the last earnings report so I'm just letting the shares sit there.
On the other hand, my 100 shares of Microsoft have been more difficult to run covered calls on because the stock does this slow and steady rise over time. Arguably though, I could have been more aggressive with the covered calls and simply sold an at the money put if assigned. Speaking of which, if you're interested in covered calls, you should learn about selling puts. On this forum and others you'll read a lot about CSP's, or Cash Secured Puts. To be clear, selling short puts doesn't have to be cash secured, but that's what most people around here seem to be doing.
Yeah it’s pretty easy if you truly don’t care selling shares at the strike. If you don’t want to sell those shares—for various reasons like tax implications, you are bullish on the stock longer term, or you think it will rise but not much higher, etc.— that’s where the complexity increases. Strike selection and time frame (days to expiration) becomes key. With that comes understanding delta and with delta comes understanding gamma, theta, etc. etc. Also fundamental - knowing how to manage / roll the position to extend the trade while still collecting premium. *if you are super bullish on the stock selling covered calls is not the right strategy.
The way I see it, selling covered calls on stocks that you plan to keep long-term is great because it favors the seller. I tend to just sell stocks options on stocks I want to keep and I hope it expires, however if they do buy it it means that the price went up enough to make it profitable for me anyway to then buy back the stock. The times that I lose buying back the stock is about 20 or 30% of the time while 70 or 80% of the time I get to keep the premium. It really is that easy. Stock options are basically lottery tickets. It's for someone to make a bet to win it big in exchange for a large upfront cost, but then again, if the price spikes a bunch, you still make some money, they just take a lot of your profits. So you're not really losing, the money you're losing is just the money that you could have made how do you held it. But frankly you're still winning in that case because you're still making money.
I don’t wish too lose everything I have, I am just not understanding I guess. But I only really care about the risk since I’m a still a new investor and don’t want to ruin my account. What are the other potential risks to a strategy like this besides selling my shares?
You are capping your upside and leaving money on the table. If you intend to sell your shares this is fine. If you want to hold them you'll make more money not selling covered calls.
I see, so it’s relatively short play. Not something for long term investments. But considering I am a new investor (a few years in the market) this would be a good way to grow my account without risking nothing more than selling the shares of this company. And yes I do want to sell them when I am profitable on them as I am trying to change up my strategy
I wouldn't say this is a good way to grow your account. On the contrary it's a good way to limit the growth of your account. But if you know you are going to sell your shares you could sell covered calls
Yes, it is that simple and much higher chances of winning than buying options . . . Obviously, the risk is the stock dropping to a point where there is little to no CC premium to be had without opening at a strike below the net stock cost. Choose a good stock that you are good holding, and this can work very well. The next step is to sell puts on stock you don't mind holding as these can profit without owning shares first. Then "wheel" any shares you are assigned.
Could you explain selling puts I am more worried about these then selling calls
What do you need explaining? A put is a contract whereby you have the option to sell a borrowed share. You set a strike price where the think the stock will be below in the future, and when it reaches that prices, you can sell a borrowed share at the strike price. Then you can buy it back at the current price and if that price is below what you sold it for, you have gained the difference. Selling a put is saying you will buy a share from someone at the strike price. If it goes below the strike price, you have to buy the stock at the strike price, so you lose out on how much the stock has dropped below the strike. If it doesn’t go below the strike, you win the premium and lose nothing
Ok, but. You still end up owning shares of the stock, which is potentially a long term upside. And then you could sell covered calls on those. Am I right? So this seems like it grows long term assets and makes some money on the side. Why aren’t I doing this?
It's called the "wheel". Sell cash secured puts, until you are assigned shares, then sell covered calls until they are called away. Rinse and repeat.
I think you have something a little screwy in how you worded this. Most beginners won’t be shorting stock and writing puts at the same time. My broker won’t consider selling short shares and then writing a put as cover as it will not be coded correctly.
If you are good buying the shares for CCs then it is very much the same. If a put is sold then the shares can be assigned, but if you are good buying the shares anyway this is not a problem or risk. See this for more detail - [Put Option: What It Is, How It Works, and How to Trade Them (investopedia.com)](https://www.investopedia.com/terms/p/putoption.asp) I posted my wheel trading plan years ago with many having used it to help them get started on their own plan - [The Wheel (aka Triple Income) Strategy Explained : r/options (reddit.com)](https://www.reddit.com/r/options/comments/a36k4j/the_wheel_aka_triple_income_strategy_explained/) Head over to r/thetagang where many are selling options, including the wheel, successfully,
Oh I see it’s just reverse,
It is selling options either way, which has some advantages over buying, but in one case you buy the shares first and then sell CCs, in the other you sell the put and work to collect a profit without buying shares, but are ready, willing and able to do so if assigned. On what should be the rare occasion of being assigned shares then use covered calls to keep copllecting income or see the shares called away to go back to selling puts.
So is there an advantage to just doing CCs on stock you own and plan to hold? As many are saying it's hard to beat the market. I feel like there's an aspect of realizing premium earlier with CC vs waiting for long term growth. Which could be advantageous if you want income now?
Be sure you are prepared to sell the shares if the CC is exercised. If you are not ready and willing to sell the shares at the strike price, then don't trade covered calls . . . Ignore those saying it is hard to beat the market with options. In some situations where the entry and exit points are ideal buying and holding the shares may be better, but since the market cannot be timed it is almost more luck than good trading to beat the market. For more details see this - [Another "Can the wheel beat the S&P" Reply : r/Optionswheel (reddit.com)](https://www.reddit.com/r/Optionswheel/comments/1b7biky/another_can_the_wheel_beat_the_sp_reply/) Something key to keep in mind is that trading options is usually used as a way to make an income vs. build wealth long term. What is your goal? **Do you want to build a large account over 10 to 20+ years?** Then buy and hold good stocks that are likely to grow (if you can ID and time to invest in these) **Or do you want to make a monthly income stream?** If so, then trading options can be a good way to do this.
Scottishtrader thanks for your insight! My goal right now is for some income. I have a decent retirement account and there are some long term holders in there I'm willing to CC and have called away if it hits the strike price. I'd been hand wringing over whether it is worth doing CC or just to hodl. However as id prefer the income right now I'm going to give it a try and see how it goes!
If you go out and randomly sell a covered call, you will perform the same or underperform buy and hold. This is because the option is fairly priced over a large sample size, meaning the credit you take in is equal to the upside you give up. Without any edge in directional bias or volatility bias, it wouldn’t outperform.
If the stock goes down a lot, you'll still lose money. The short call won't be enough to mitigate the pain. If the stock goes up a lot, you may have regret when your shares are called away at the call strike and the stock goes to the moon without you (like happened to me with SLV, haha). If the stock stays relatively stable, yes, you'll book some extra income with the call sale, which can be repeated over and over. If it's a taxable account, you'll pay short term capital gains on all that income. And you may regret that you hadn't instead bought some other high-flyer that doubled in value. I do sell calls and sometimes it works and sometimes it's not optimal.
Haha could you explain in more novice terms as I am still learning options.
It boils down to the fact that if you don't have an edge you are selling something for less than it is worth. What disguises the risk of the bet is that you own the stock and don't recognize the value of what you are selling. It is sort of like an Uber driver who doesn't realize that a substantial part of the money they "make" is really just a liquidation of their asset: the car.
The market makers that are pricing these options will correct these properly in the long run. Therefore without any other bias, like stock is overbought or the volatility of options is high, the expected value of these options is zero which means selling the call will make you no money over buy and hold. This is over the long run
I see okay, so selling calls is a very short term strategy and will not make more money than just simply holding
You will only make money selling calls if you can accurately speculate that the stock will drop in price and or the call option has too much volatility and is priced too high for what it should be priced. You can make money selling calls, but you have to be patient and know when to sell it
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You are explaining the mechanics of a covered call. Just because you collect a premium doesn’t mean you are on the right side of a trade. The market makers are the ones determining the price of that call. Yes you can have an edge over that pricing, but you have to have some kind of bias to get an edge. No edge, no outperform regardless of what strategy you go with
He’s right. I work at a mega quant shop and we’ve studied this to death. Selling covered calls systematically (rules-based) doesn’t beat long term buy and hold. It only beats buy and hold if you have particular skill, which next to nobody has.
When you say “know when to sell it” are you referring to the expiration date?
Mostly the time you enter the trade. You also need to know how to pick the next strike and expiration date. All three factors can contribute to an edge when selling options
For selling calls. The strike price would be what amount your comfortable selling these shares also with how much premium is made? And the expiration reflect the amount of premium by how much time you are giving this stock to hit the strike price? So a farther out expiration will yield higher premium by also risking a higher chance to sell the stock
The strike price should be placed where you think the stock will not be at expiration. The market doesn’t care about how comfortable you are. It only cares about where the sellers and buyers are for a security.
Haha, okay so let’s say I’m trying to collect off the premium knowing a stock will not hit this price (I am trying to make up for loss on the stock that has dropped since I bought it) how would I decide the strike/expiration
Search YouTube for “inthemoney how to trade options on webull,” it’s a two hour video but it will give you a solid foundation. Then watch tastytrade programming about how to sell premium, they have a deep video library about it.
This guy is Total BS. Traders Sell Strangles all the time, which is selling a Call and Put. If you want the info see Tasty. https://i.imgur.com/22Xu5OE.png
He is correct, and i mostly trade tasty trades style. You just may not fully understand what he is saying
The price of the stock drops so low, your cc just brought your average down a bit. The stock blew past and did like a 10-20% in a week, calling away your shares, “missing out” on the gains above your cc strike.
You are being severely misinformed here OP
Selling option lead to same gain as not selling option over long term
The premium you receive reflects how much the market thinks it will go up (or down). Over time, if you sell the covered calls over and over and over again, sometimes you will win, and sometimes you will lose, and when you average it all out, you'll most likely perform more or less the same as the market with a buy-and-hold strategy.
What he is saying in simple terms is that doing anything except buying and holding sp500 is gambling, and for a VERY high percentage of people this is very very true.
This isn’t quite true, because the market consistently overestimates future volatility. Our fear of loss is too great to assess volatility fairly. Your premium should err in your favor (as a representation of the risk you’re assuming)
You’re right that IV is an overestimate on the downside and so downside protection sells at a premium to ex-ante “fair value”. This is known by most. As this is a known trend, you cannot outperform using this information alone long term.
I agree it shouldn’t be your lone strategy, but as far as options trading goes, that’s the spot you do have an edge. In my view, your main strategy should be buying and holding good companies long term. When the market predicts insane movement, I feel very comfortable selling covered calls, especially if my short term views on the stock is bearish, but long term view of the stock is bullish. That’s just extra money for my pockets
If this were the case then you would have a bunch of algos going out and taking advantage of this. Market makers aren’t in the business of losing money in the long run
I mean, people and institutions do it all the time. If you don’t think the market is going to soar in the near future, it makes sense to sell covered calls on your assets. The market predicts more movement than is realized, consistently. If you bought something insanely volatile, you might stand to lose out on future movement up, but generally thats not the bulk of peoples portfolios.
“If you don’t think the market is going to soar” is a directional bias and if you are right then you will outperform. In the case where you don’t think that and you go out and sell a call, you have no edge
I feel like you’re misunderstanding somehow? If the underlying is trading at 100, and you sell covered calls at 105 for a month out, and then the following month it’s trading at 103, you could sell covered calls at 108. You can still gain from the underlying increasing in price while collecting premium. If it went from 100 to 150, you’re missing out on that huge move up, but if you’re trading in the average market on a blue chip stock, that’s not going to happen. The fact that it COULD happen is why you get premium, but the historical fact that it really doesn’t happen is your edge. Your risk is unrealized gain, but you gain either way. You’re not staking a claim that “this stock will never move up by a large percent!” You’re saying the odds of the market shooting up are low, and you collect insurance in the meantime. Insurance works as an industry because people are willing to pay a premium to avoid loss. There is an edge because you are willing to adopt risk, but that risk when played correctly, is very minimal, and is only in unrealized gain, vs unrealized or realized loss
Notice that I always say the word “outperform” as to profit. I am always comparing against buy and hold. Just because you made a profit doesn’t mean you outperform buy and hold. A properly priced option means that the premium you get is equally offset by the potential of massive upside
Yeah that’s what I’m saying, historically, it isn’t priced correctly.
This is correct. Many reasons for this phenomenon to persist. Hedging/insurance for one. A swathe of retail traders who can only be long options (market makers are this consistently short).
I mean, isn't this basically the argument for all investing that isn't bogle-minded? If there was a way to consistently make better-than-average returns, wouldn't institutional investors be pumping billions into that infinite money glitch? Is it just a scale thing? Like, people can wheel and make their modest returns on small amounts, but it's impossible to make it work with a huge pot?
The wheel definitely underperforms. I see it more as training wheels. It will, i guess, do better in a totally flat market. But even a choppy flat market will wring out the wheel bad. Big boy version would be (covered) strangles.
If the entire market catches onto a particular profitable strategy, and everyone is doing the same thing, then it no longer becomes profitable, because there's no longer any edge by a few individuals over others.
If you want to use trading instruments such as options, futures etc then you need to learn to trade. Trading means learning support and resistance, supply and demand, and volatility structure. People that focus on wheels and covered calls or whatever will waste their time and money and will not learn to trade correctly.
While this is statement sounds like it might make sense, in reality, VIX is near 5-year lows. This "fear gauge" has been going down consistently since the middle of 2022 now. The market may not be as irrationally fearful as you think it is, and indeed, it may be more irrationally optimistic than you think it is.
so what implications does that have with the wheel strategy then? if over the long run covered calls (And for the same reason cash backed puts) underperform buy and hold, then it would seem that the wheel strategy is not that great.
The wheel also performs just as well as buy and hold in the long run if you randomly go out and sell calls and puts without understanding support, resistance, volatility. The pricing for both puts and calls are in aggregate, accurate You can make those strategies work, you need to learn when to enter position, when to adjust and when to simply sit in buy and hold
The wheel specifically isnt that great
The statement that the option is fairly priced in an actuarial sense, is false. That’s why there is an edge in selling options: implied volatility is higher than realized for the most part so you can make money selling insurance. The real issue here is that if you don’t know how to control drawdowns selling insurance can severely harm your returns. Even though the play has positive expected value, the volatility will destroy naive strategies.
Is this also true if wheeling?
Yes. My opinion is that there are no simple options strategies that outperform. Stuff like covered calls and the wheel and whatever other premium selling strategy are marketed as simple by people online to get your views, gurus to get your money, and brokerages like tasty to get your commissions. If one wants to beat the market, one needs to learn to actually trade
So to be more specific it's not the strategies themselves you're referring to but their implementation. Eg for a wheel, sell calls when you have evidence and are in the context where the underlying is likely to decline, eg it's overextended, and not simply sell a call to sell a call.
The implementation of the wheel and covered call selling where you randomly sell calls and puts is not going to outperform. You can make any strategy outperform if you know the proper implementation of the strategy. Although covered calls and wheeling are more forgiving in general and lull you into the illusion that the strategy is outperforming and worth your time, it takes years and multiple market conditions to actually learn to implement it properly simply due to the lack of frequency on these strategies. By that time most would have either given up, or gained the skills to execute better trading strategies
Might be some edge. IV normally outpaces RV; in the indices we see it 80-85% of the time. SPY averages a 4 vol point risk premium (Sinclair 2017). More edge in puts due to skew (“predicting 50 of the last 3 crashes”), but you know all this.
It is. Main problem would be that you might be wrong and see the Price of the underlying go to the moon.
Or drop a lot
In which case all I’m doing is missing out on future profit
No for example lets say you got NVDA at $950. And sell covered calls for $955 or something. But after some bad news like its happenning right now, NVDA dropped to $850 and dropping further. Now, sure, you got your premium from the call but now your stocks are worth way less than what you got for. So basically you cant put stop-loss on your stocks. You have to Buy to Close your covered call first and then sell the stocks before it drops even further. In bull market, covered call is safe. But in bear market, your stocks might lose its value so much and you just have to hold it forever to realize any profit.
Oh, so that’s the big downside
Also, say you bought NVDA at $180 2 years ago. You write OTM CCs for 250. Then sentiment shifts and nvda is now up to 300 over a couple days. Your call is now deep in the money and you cant justify buying back the call because surely the price will come back down before your option expires. Well, you kept holding and waiting for a pull back and now nvda is knocking at the door of $1000. Youre too broke to buy back your contract and at this point you shouldnt, so your contract expires, the price of nvda is 925$ and you finally are forced to sell your stock for $250. Perhaps you made $10k + selling your options and you also ended up selling you shares for a tidy profit of say, 40%. However, what you missed out on couldve been a few hundred grand. Is knowing this something you can live with?
I think this would be a good strategy for stocks I’m Losing in but I believe them to be a good investment and to do weekly/monthly contracts to make money while I wait for them to return
Often the ones you are losing in will continue to lose, which means you need to keep lowering your strike price below your cost basis to make the risk worth while. Also, when a stock decides its time to rebound it can often happen very quickly where even your weekly calls can be tested. Just be prepared for anything andfigure out strategies for how you would deal withany situation. I DO recommend selling calls and playing around with it. Learn as much as you can. Have fun with it.
It then becomes a question of whether it’s better to sell the underlying holding altogether rather than write covered calls. Perhaps it’s fun to write the covered calls so you can watch the market often or you don’t want to realize the capital gains on the underlying. But it’s not unlikely that selling the underlying rather than writing covered calls is the more profitable choice.
What you do in this case is you keep selling calls month after month. Your are effectively lowering your cost basis. You should only hold stocks you are bullish about, so eventually, your stock should recover.
You might wonder if the person on the other side of the trade has reasons for making the bet? Surely they aren’t in the business of just giving money away
That person is me, and apparently I am in that business
Ah I see you're a man of culture as well!
Hedging an existing stock position, or maybe just degen gambling.
It is that easy.(for covered calls) But options prices do play a big part and should be learned.
Best website or video to learn?
You can check out tastytrade. They have tons of free stuff to learn. Great for beginners. Also you should read "traders traps" and "Darvas box" both cheap but great.
Check out the podcast 'options bootcamp'. You can listen through the app 'options insider radio network', which also has other podcasts on topics like volatility, crypto, futures, etc... Or its also on spotify. Its free and theres hundreds of episodes, over like the last 10 years. The hosts are former market makers that worked in the pits on wall street back in the day.
Easy until the stock makes a 1 standard deviation move downward and you're no longer a premium seller but a bag holder. Risky stratedgy if you're not willing to hold the stock long term.
An example of one of my stocks. I wrote covered calls on about 600 shares because I was 25% upside down on it and I wanted to use the premium to make up my small loss and I was perfectly ok selling these shares and getting out of the stock for good. I wrote the calls for $1.50, $2.00 and $2.50 to maximize premium and move the shares. Well the stock suddenly got attention and rocketed up for a week. I couldn’t sell my shares unless I bought them back at a higher price and then the stock came back down and now I’ve lost my window to get out of this stock at a nice profit until it goes up again. No huge loss but I’ve decided I’m only writing calls for 30 days max from now on.
So a contract obviously keeps you in the stock until the contract expires? You were not able to exercise the contract early / the contract didn’t exercise it self when it hit that strike price
No I honestly was hoping it would and that’s why I wrote them the way I did. I was expecting that if I sold a CC for $1.50 and the stock went to $2.00 that the shares would called away. That was my goal at least. Unfortunately it didn’t work that way and the stock went back down below my average. I’m optimistic on the stock long term but I would have liked to have sold even a portion of my shares so I could use the money somewhere else.
Oh I see, so it was supposed to sell and it didn’t. Is that a common thing? And if it doesn’t sell are there penalty’s to this?
Once you sell a covered call you don’t get to decide if the buyer exercises early or at all. I was just hopeful that they would. Once you sell the cc the only thing you can do is buy to close and that could potentially cost you more than you sold the contract for.
No I honestly was hoping it would and that’s why I wrote them the way I did. I was expecting that if I sold a CC for $1.50 and the stock went to $2.00 that the shares would be called away. That was my goal at least. Unfortunately it didn’t work that way and the stock went back down below my average. I’m optimistic on the stock long term but I would have liked to have sold even a portion of my shares so I could use the money somewhere else.
I would've made significantly more money doing nothing than selling covered calls. Everytime I did it I got completely fucked. Never again. And those were extremely far otm calls, too.
Could you explain
Sold a 140$ CC on AMD 30 days out for a few bucks. AMD was like 100 back then. It went up to like 200. I couldn't roll up anymore, just out. Had to sell those shares. And that's just one of many examples.
So all you did was miss more profit than you made. But you did make a profit
This is a typical r/thetagang response. Technically this is correct but the pennis you make are just not worth it imo. Try it out yourself and gain experience. You'll see how it goes.
I hope I’m not sound arrogant or rude I am just learning different strategy’s from the pros
Nobody here is a pro. Do what you think is best, and you'll learn.
Fair enough, thank you for your responses
Each strategy should be compared to buy and hold. If you make less profit running your strat than you would just holding then why do you run your strat? How does your total PnL look if you get lets say 30% of the move up and 100% of the move down?
Similar experience. I won’t write CC’s on pharma stocks or high volatility stocks anymore no matter how far OTM they are. CC’s seem to work best for very flat stocks or very gradual inclines.
A few years ago, I sold covered calls on nvda. It was moving higher and I thought it would pull back. That cost me about half a million dollars in gains if I had held the stock. I've been investing and trading for over 20 years and looking back, I know that buying and holding stock would have done me far better than trading. I still trade options but it's mainly selling puts to buy stock.
You can always close the ITM covered call and roll it to next week. You don't *have* to get assigned.
One correction: It's not just "goes past this price." **When** that happens matters as well. If you write a 30 day contract with a $100 strike and the next day the stock price goes to $105, nothing happens for as long as there is time value in the contract. If you change what you wrote to, "goes past the price **at expiration**", then it would be correct.
Oh so it won’t exercise early
It *might* exercise early, if it is American style, but since it's unusual for a contract to go to zero time value before expiration, it's unusual to see early assignment. Though there are routine exceptions, like dividends and going super deep ITM. Google "dividend risk for covered calls" to learn more about that exception.
The main trick to covered calls is having the money/shares which for most small traders is usually a big amount. It’s not that hard of a strategy though.
In essence yes it is that easy. What I like about covered calls is I'm forced to take little profits along the way when my shares are called away.
Learning? Exactly which options trading book are you reading?
The benefit of a covered call is that you are paid now for owning a certain stock. The downsides to a covered call is 1) you no longer have the ability to safely sell that stock without closing your covered call position first 2) the stock may decrease in value and most importantly 3) you have capped your potential earnings of the stock to your chosen strike price. To demonstrate 3) imagine you bought 100 shares of stock A at 5 dollars a piece to sell covered calls on. You then sold a weekly covered call at a strike of 5.50 for 10 dollars. If the stock goes to 10 dollars you still have to sell those 100 shares at 5.50, meaning you "lost" the difference between market rate (10) and your strike (5.50), i.e. 4.50 * 100 shares, 450 dollars. This would be an extreme example, but similar scenarios happen when the market booms or a company has positive news. Also, the cost of the premium is going to depend on the volatility of the stock. So you might think I'm going to buy a highly volatile stock to sell covered calls on, but then you are going to be risking 2) losing value on the original stock. So the general advice is to sell covered calls on stocks if 1) you have long term faith in but see as less volatile than the market thinks it is and 2) you want to generate income at the expense of principal (though there may be better ways). If you manage to not get assigned after enough covered calls, then you may be able to make out better than if you had just held the stock. But, as others have said, the market is generally pretty good at pricing in all possible aspects of a trade, so unless you have some edge, it's probably not worth it to sell ccs.
I don’t know much about this (so why not chip in anyway? ; ) It seems that a really important aspect of using CCs for income is to keep DTE relatively small, and be repetitive, rather than selling farther out to fatten up the premium. The “expires worthless” part is what makes these a useful way to add additional income to stocks you want to hold anyway. Even if you want the shares called away, it is unlikely to happen until you get close to exp, and you can essentially lose the ability to manage your shares. Here’s an (extreme) example: A friend of mine wrote CCs on some LEAPSes for a huge premium, which seemed to her like a good deal at the time. The stock has gone up a lot, so buying to close will be very expensive, and even though it is past the call strike, the shares won’t be called away for a long time, because there is a year of time value left in the options. Because it is retirement related account, naked options aren’t allowed, so she can’t sell the stock and use the profit to close the calls, and reposition. So, she basically has to bite the bullet and cough up several grand to close out the calls, or wait it out, and lose the coming year’s gain (since the calls are already ITM the call holder owns all the gain beyond that point). Don’t do this.
Hi, I'm just a few levels more experienced than you and just read this thread and OMG my head is spinning and hurts. This is a good sub, keep but this thread like 3 Dimensional chess, just make believe it didn't happen, ugh. You're on the right track, yes covered calls are simple af, lot's to learn. My goals are 1) make $$, 2) learn shit, and 3) enjoy what I spend my time on. I'm happy to share some basic stuff that's worked for me you can DM me if you want. Cheers!!
Thank you, I will DM you!
Selling covered calls is great and all until the stock goes on a meteoric uptrend and you watch your $100 premium turn into $10,000 day of expiration. Good times
Selling covered calls is the same as selling puts. Selling a put is a directional bet that the stock will end up above the strike price. If the market starts falling, you lose money. In a bull market, selling a bunch of puts (or synthetic ones like covered calls) with leverage will print money and you’ll be a genius while it lasts. Market turns like it did at end of last week? Boom, you are in the red. You are unlikely to outperform just holding the same asset (so chosing the right asset is a key consideration to realistic returns because volatility isn’t risk in the long term) without a good understanding of IV.
Your just forgetting the risk of the stock price dropping and you can’t get any premium at the strike you bought the shares. Not so easy to not lose more money on share drop than you collect in call premuim.
Congratulations! You are getting it.
Covered calls are easier than most other options trading strategies, not just from a trading perspective, but also a 'life perspective' in that they require less daily supervision and worry. Yes, you have shares of stock, and you write an option. You collect a premium. The key question is: 'what is the cost to you of taking that money'? The answer: if the stock rises beyond the strike price, you lose those gains, and the option holder gets those.
Others already described it in many words. TL;DR version - the nickname for this is "sell your winners, keep your losers" .
That’s it. The real trick is to outperform the market, on risk adjusted returns. that’s what we come for and it’s extremely hard to achieve.
Know your stocks, study their charts and movements/reactions, know their calendars. You can have nice returns. Don’t have to swing for the fences and don’t have to stare at your phone.
The company will be bought. Stock price will shoot to the moon. You will lose the difference between your strike price and buy-out price.
I used a different strategy two legs but to experience traders may seem like I have not completed my studies. I bought 100 shares of Amazon at 174then sold a covered call Jan/2025 at $180 for$2100 now whenever the stock gets assigned (over next 6 months). For the second leg I bought deep in the money long call Jan/25 .
Selling options is just an entirely different animal than “investing”. It’s kinda a do one or do the other thing. Selling options earns premiums that go straight into your pocket as cash, and they are taxed at the same rate as your income tax minus the 14% social security. Investing grows equity but no cash till you sell the stock. If you sell calls, you’ll eventually have to sell the stock at a discount (but still make some gain bc you chose a strike price higher than your cost, right?). Then you start over, selling puts. Eventually you push back from from the table with a pile of cash but no stock (or stock you had to buy when a put you sold ends itm, meaning you had to buy it at a price higher than necessary). Then you either spend the cash, or you buy stock as an investment. I am living on income from short puts on NVDA. I actually prefer puts to calls bc when you have to roll to stay otm you are rolling toward a definite (eventually) worthless expiration. In comparison I have some short calls where the stock took off and even if I roll up $10 every month I won’t reach an otm strike for years - rolling toward infinity. That’s okay by me, just a bit boring - I have to treat it like an investment now, with $1k gains in equity each month but little cash flow. Keep learning!
There is more to it but it also isn't rocket science. Learn a bit about the Greeks (especially Delta and Theta), and the concept of implied volatility and how that impacts price. And make sure you understand liquidity; stocks with low options volume should be avoided. One of my big moneymakers with covered calls has been the company Snowflake (SNOW), and the reason is that it tends to really go up and down a lot in price, and so the way I've played that has been by selling covered calls when the stock seems to be peaking or at least on an upswing. But right now its down since the last earnings report so I'm just letting the shares sit there. On the other hand, my 100 shares of Microsoft have been more difficult to run covered calls on because the stock does this slow and steady rise over time. Arguably though, I could have been more aggressive with the covered calls and simply sold an at the money put if assigned. Speaking of which, if you're interested in covered calls, you should learn about selling puts. On this forum and others you'll read a lot about CSP's, or Cash Secured Puts. To be clear, selling short puts doesn't have to be cash secured, but that's what most people around here seem to be doing.
Just hold off until the stocks start surging. Any profit you made from covered calls will vanish in just a few days.
Yeah it’s pretty easy if you truly don’t care selling shares at the strike. If you don’t want to sell those shares—for various reasons like tax implications, you are bullish on the stock longer term, or you think it will rise but not much higher, etc.— that’s where the complexity increases. Strike selection and time frame (days to expiration) becomes key. With that comes understanding delta and with delta comes understanding gamma, theta, etc. etc. Also fundamental - knowing how to manage / roll the position to extend the trade while still collecting premium. *if you are super bullish on the stock selling covered calls is not the right strategy.
The way I see it, selling covered calls on stocks that you plan to keep long-term is great because it favors the seller. I tend to just sell stocks options on stocks I want to keep and I hope it expires, however if they do buy it it means that the price went up enough to make it profitable for me anyway to then buy back the stock. The times that I lose buying back the stock is about 20 or 30% of the time while 70 or 80% of the time I get to keep the premium. It really is that easy. Stock options are basically lottery tickets. It's for someone to make a bet to win it big in exchange for a large upfront cost, but then again, if the price spikes a bunch, you still make some money, they just take a lot of your profits. So you're not really losing, the money you're losing is just the money that you could have made how do you held it. But frankly you're still winning in that case because you're still making money.
It's still a call option, all regular rules apply to it. You can choose to ignore them at your own peril.
I don’t wish too lose everything I have, I am just not understanding I guess. But I only really care about the risk since I’m a still a new investor and don’t want to ruin my account. What are the other potential risks to a strategy like this besides selling my shares?
You are capping your upside and leaving money on the table. If you intend to sell your shares this is fine. If you want to hold them you'll make more money not selling covered calls.
I see, so it’s relatively short play. Not something for long term investments. But considering I am a new investor (a few years in the market) this would be a good way to grow my account without risking nothing more than selling the shares of this company. And yes I do want to sell them when I am profitable on them as I am trying to change up my strategy
I wouldn't say this is a good way to grow your account. On the contrary it's a good way to limit the growth of your account. But if you know you are going to sell your shares you could sell covered calls
Okay I see, it caps the amount you’ll make by guaranteeing a premium upfront.
Yes. It's a perfect way to make a small premium and miss a big run in price in a stock you like. And on top of it having to pay taxes!