Help - selling covered calls

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Meaty
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Joined: Mon Jul 22, 2013 7:35 pm

Help - selling covered calls

Post by Meaty »

I know options aren’t usually discussed but I deeply value the expertise on this forum.

As far as I can discern, selling covered calls has only 2 risks. One, the value of the stock declines (true anytime holding individual stocks). The second is the risk the security expires in the money - but even this is limited because you’re paid the strike price (plus premium)

Are there any other risks I’m not understanding? It seems like a low risk way of earning extra income. An example

Purchase stock at $30/share
Sell covered call - expiry next month, strike $32/share
If expiry below $32, I keep premium and stock
If expiry above $32, I keep premium and my stock is purchased from me at $32

In either event I’ve made money.
"Discipline equals Freedom" - Jocko Willink
livesoft
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Re: Help - selling covered calls

Post by livesoft »

Sure you make money, but you also lose the chance to make more money. The Total Stock Market Index has gone up 16% since November 1st. If your stock was called and kept going up , up, and up, what do you do?

I think prices tend to move in spurts. Options are using implied volatility to set their prices, but there is no free lunch. No one would buy a covered call from you if they didn't think they could make their own money from it, so you should not expect that in the long run that you will come out ahead of the people you are selling to.

You are kinda like the folks who say, "I love my advisor because my portfolio was up 15% last year. I feel great." But the market was up 30%.
Last edited by livesoft on Fri Dec 18, 2020 6:47 am, edited 1 time in total.
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btax80
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Re: Help - selling covered calls

Post by btax80 »

The biggest risk, in my opinion, when selling covered calls is the risk that the stock will rise sharply and you will cap your gains for a relatively small premium. It's opportunity risk.
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livesoft
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Re: Help - selling covered calls

Post by livesoft »

Another thing: If you want to do any tax-loss harvesting, but have sold a call on the underlying stock, then you sort of cannot do that because the call would not be covered anymore. You'd have to close out the covered call first at an additional cost to you.
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Chicken Little
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Re: Help - selling covered calls

Post by Chicken Little »

I've thought about this, and always conclude it doesn't make sense.

1. If it's something you want to hold and it rises in value, you'll miss the gain for a small fraction and defeat the purpose of holding it in the first place.

2. If you wanted to run it as a side business, or buy something you wouldn't otherwise hold just to sell the call, the downside risk is way too big.

The goldilocks zone would be to identify a stable company that trades within a narrow window where you sell calls and collect fees without worry.

Anytime I look into options, I walk away with the notion that they are simply tools to be embedded in a larger plan. Since selling the covered call would be the limit of my plan, I never bother.
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Meaty
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Re: Help - selling covered calls

Post by Meaty »

Thanks to all that have replied. I’m looking at the premiums and they also seem rather muted; almost not worth the effort of setting these up. That said, I’m glad I wasn’t blatantly missing another risk.
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runninginvestor
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Re: Help - selling covered calls

Post by runninginvestor »

You have it about right, and as others have said about was sales - that can often be overlooked. It's not low risk per se, but you can manage your risk by being diligent, delta and how far in/out of the money you select, days to expiration. If you're using it as a risk management tool, it helps to have some guidelines of how much profit and loss you'll exit at BEFORE entering the position.
Valuethinker
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Re: Help - selling covered calls

Post by Valuethinker »

Meaty wrote: Fri Dec 18, 2020 7:23 am Thanks to all that have replied. I’m looking at the premiums and they also seem rather muted; almost not worth the effort of setting these up. That said, I’m glad I wasn’t blatantly missing another risk.
Selling covered calls is mostly for individuals who have a large position in an asset, and don't want to realise the asset due to capital gains.

You give away the upside in return for a premium. My father used to do with with his GE shares (at that time he was 10x book cost - he would not be, now). However over time the premia offered diminished -- the market did not find a shortage of GE stock.
bugleheadd
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Re: Help - selling covered calls

Post by bugleheadd »

sucks when the stock pumps like TSLA. imagine having to give up your shares when it went from 400 to 600 in a week or two. sure you can roll out, at a cost.
Shallowpockets
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Re: Help - selling covered calls

Post by Shallowpockets »

OP your premium not worth the hassle is because you are dealing in a small price stock.
Also the premiums are usually much higher during earnings season.
If you buy TSLA today, now, at $670 and sell right away a covered call for tomorrow expire, you get $745 for that.
If it gets called you are you total, $3745 between now and end of market tomorrow.
If it does not reach the $700 strike, you look at selling a CC for next week.
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TheTimeLord
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Re: Help - selling covered calls

Post by TheTimeLord »

Shallowpockets wrote: Fri Dec 18, 2020 9:32 am OP your premium not worth the hassle is because you are dealing in a small price stock.
Also the premiums are usually much higher during earnings season.
If you buy TSLA today, now, at $670 and sell right away a covered call for tomorrow expire, you get $745 for that.
If it gets called you are you total, $3745 between now and end of market tomorrow.
If it does not reach the $700 strike, you look at selling a CC for next week.
Not sure why stock price matters, especially if you don't know how many shares are involved, I would be measuring based on percentages net of fees. The higher the stock price the few shares you own and you need round lots for covered calls.
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Shallowpockets
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Re: Help - selling covered calls

Post by Shallowpockets »

TheTimeLord wrote: Fri Dec 18, 2020 9:49 am
Shallowpockets wrote: Fri Dec 18, 2020 9:32 am OP your premium not worth the hassle is because you are dealing in a small price stock.
Also the premiums are usually much higher during earnings season.
If you buy TSLA today, now, at $670 and sell right away a covered call for tomorrow expire, you get $745 for that.
If it gets called you are you total, $3745 between now and end of market tomorrow.
If it does not reach the $700 strike, you look at selling a CC for next week.
Not sure why stock price matters, especially if you don't know how many shares are involved, I would be measuring based on percentages net of fees. The higher the stock price the few shares you own and you need round lots for covered calls.
Higher stock prices usually higher premiums. I don't look at percent, I look at money. And yes, 100 shares is one contract. Since the title this thread is CC, you would need that 100 shares for one contract CC.
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TheTimeLord
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Re: Help - selling covered calls

Post by TheTimeLord »

Shallowpockets wrote: Fri Dec 18, 2020 12:04 pm
TheTimeLord wrote: Fri Dec 18, 2020 9:49 am
Shallowpockets wrote: Fri Dec 18, 2020 9:32 am OP your premium not worth the hassle is because you are dealing in a small price stock.
Also the premiums are usually much higher during earnings season.
If you buy TSLA today, now, at $670 and sell right away a covered call for tomorrow expire, you get $745 for that.
If it gets called you are you total, $3745 between now and end of market tomorrow.
If it does not reach the $700 strike, you look at selling a CC for next week.
Not sure why stock price matters, especially if you don't know how many shares are involved, I would be measuring based on percentages net of fees. The higher the stock price the few shares you own and you need round lots for covered calls.
Higher stock prices usually higher premiums. I don't look at percent, I look at money. And yes, 100 shares is one contract. Since the title this thread is CC, you would need that 100 shares for one contract CC.
Point is the higher percent is the larger premium.
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idc
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Re: Help - selling covered calls

Post by idc »

I used to sell covered options when I got a lot of ESPP stock vests from a former employer. Did not really need the money and liked the potential up side. I gave up after a while. The downside was that the stock wasn't too volatile at the time, so the value of those options wasn't that much.

There were a lot of complications as a result, such as a big pain for taxes, wash sales rules when things got exercised and a new portion of ESPP would vest, etc. Might make sense when the stock is more volatile, but then you're selling your upside potential then.

Too much of a headache for me so I gave up.
DurangoWino
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Re: Help - selling covered calls

Post by DurangoWino »

It all depends on how much of the $30 stock you are buying. If you are getting 5-10k shares then you can bring in quite a bit of cash. I do it every year with stocks I own but I go out a year and push up the entry price of what I am selling. Let’s say your stock price is selling now at $30 and you own 10k shares. This gives you the ability to sell 100 covered calls. If you look out two months the calls may only sell for .2 ($20) for $32 calls. But if you go out a year to Jan. 2022 you may be able to sell $38 calls for .6 ($60).

So selling the $32 calls two months out brings you in $2000, but selling the Jan. 2022 calls brings you in $6000 and you get the difference in $32 and $38 if you get your stock called away from you. If the all time high for your stock is say $34 then you may have a better chance of your stock not getting called away. It is a gamble that you take, but the way I look at it if I am selling covered calls for more than I bought the stock at and it gets called away, I will just go find another stock and do it all over again.

Typically I use the call premium to buy more stock. Kind of a way of extra compounding.
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TheTimeLord
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Re: Help - selling covered calls

Post by TheTimeLord »

DurangoWino wrote: Fri Dec 18, 2020 12:33 pm It all depends on how much of the $30 stock you are buying. If you are getting 5-10k shares then you can bring in quite a bit of cash. I do it every year with stocks I own but I go out a year and push up the entry price of what I am selling. Let’s say your stock price is selling now at $30 and you own 10k shares. This gives you the ability to sell 100 covered calls. If you look out two months the calls may only sell for .2 ($20) for $32 calls. But if you go out a year to Jan. 2022 you may be able to sell $38 calls for .6 ($60).

So selling the $32 calls two months out brings you in $2000, but selling the Jan. 2022 calls brings you in $6000 and you get the difference in $32 and $38 if you get your stock called away from you. If the all time high for your stock is say $34 then you may have a better chance of your stock not getting called away. It is a gamble that you take, but the way I look at it if I am selling covered calls for more than I bought the stock at and it gets called away, I will just go find another stock and do it all over again.

Typically I use the call premium to buy more stock. Kind of a way of extra compounding.
You are the second person I have seen mention that on this forum this week.
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