Hi guys, I read a guide on covered call writing that said the best stocks for covered calls are the "slow mover" type. eg Verizon, General Mills, General Electric etc. Do you agree that these are the best stocks to use for covered calls? Or are growth stocks better? like Paypal or Nvidia for example. Thanks
The best stock for a covered call is one that you have confidence is moving up. You write a call on VZ and it suddenly cuts or eliminates its dividend, you'll find yourself sitting on a big loss.
If there was one that was better than others, then that's what everybody would use... which would make the cost go up until it wasn't better any longer. Basic supply and demand. So, no: there isn't anything that's "better" by any obvious metric. Slow movers have a lower IV, which means lower premium and thus lower return. More volatile stocks return more, but you "pay" by taking on that volatility risk. As an example, a GM 34d 30D call is selling for about 2.7% of the spot price, while the equivalent call in TLRY is around 10.9% of spot. So how do you define "better"? The answer is that there's no easy answer: everything depends on your risk tolerance/appetite, confidence in the underlying (obviously, you don't want it to come crashing down), and perspective on the stock in general. Do you want to hold it for the long term and just increase your returns while you do? Are you thinking of this as an income strategy? What will you do if there's a sharp drop and you can't sell at or above basis? If it rallies strongly, are you OK with the stock being called away, or will you try to manage your way out of that? Stock selection is just one of the questions to be answered, and the selection criteria come down to the broad picture of what you want.
@BlueWaterSailor gave excellent answer. For myself, I prefer volatile (growth) stocks. First, you get actually paid for the risk you are taking. The slow movers have “hidden” risk. They are assumed to be safe, but it doesn’t mean that they can not loose half of their value on news event. So you lulled into increasing position in order to generate meaningful returns. But the big difference is that the growth stock has a better chance to quickly bounce back (providing opportunities), while sleepy stocks may be stuck at that new price for centuries.
There are no best stocks for covered all. If you have stock that you are thinking of doing covered calls on it, it's better you don't touch it or dump it if you already have it to cut the losses. If the stock is in an uptrend, it's so much better to just buy the stock itself or buy the call. IMHO
I will give you 26 companies that you "could" do covered calls on. The market is way up, so this might not be great advice. It is best when you have a slow market and the government isn't printing money. With your strategy the company should be an industry leader...Is growing or not losing market share. It would be a company you would not mind holding on to during a recession. It may pay some type of dividend. Here is my list I have used over the years...Do your own research. Example if you look at the last 10 years of GE, you would freak out. A lot of pension requirements to deal with... I no special order; CVS, CHH, SYY, IBM, BABA, BA, TSN, MATX, GOOD, QQQ, CAR, BG, ADM, XOM, CVX, TGT, IBM, AAPL, DUK, WELL, CCS, MCD, EMB, BP, VZ, LOW, GE, F...Now go spend a few hours to do some research...Tell me what you think.
If you use a growth stock (one that will go up quickly), and write a covered call, you run into this situation: BUY XYZ @ 100 Covered Call @ 120 XYZ hits 150 You sell at 120 Profit: 120 - 100 + premium = 20$ + Premium If you had not written the covered call your profit would be: 150 - 100 = 50$ The premium you will get from writing the covered call is unlikely to be 30$ to make you break even. It will be very difficult to choose a stock with a premium that will reach a certain strike in a certain period of time that will yield you better results than simply buying & holding. And if you could do this, one might ask why not just buy CALL options instead. If you use a slow stock, spikes/volatility is less likely, so you're situation will be more like: BUY XYZ @ 100 Covered Call @ 120 XYZ Hits 110: Collect Premium XYZ Hits 125: Collect 120-100 + premium : 20 + Premium In this situation, you are less likely to miss out on a big spike in stock price. You will however, get a much smaller premium for your trade. Option premiums are based on the likelihood of a spike occurring (volatility). In my humble opinion: Writing covered call options is a valid strategy to collect a little extra 'premium' on a stock that you would otherwise be holding (because you believe it is a good investment). And you are pricing the potential sale at a price you would be willing to sell at, anyways. I.e.: BUY XYZ @ 100 You think: If this goes up 20$ in the next 3 months, I will sell it as soon as it hits 120$ Write Covered Call @ 120 XYZ hits 120: (Normally you would sell, but you do not, you let the option exercise potentially) XYZ hits 150: Option exercises, you sell at 120 (which you were going to do anyways), and keep the premium. If, however, your plan is to hold indefinitely (long term investor), you run the risk of selling too soon (120/150) when you really wish to hold it for years. And you may end up thinking of buying it back at 150 because you wish to keep it in your portfolio. In this situation, it could have dire consequences: BUY XYZ @ 100 SELL @ 120 BUY @ 150 SELL @ 170 BUY @ 200 Your profit would be: 120-100 + 170-150 = 20+20 = 40 Instead of: 200-100 = 100 In other words: Closing out positions prematurely due to covered calls being exercised will result in you loosing out the big gains, and holding during potential drops. (Imagine buying TSLA @ 200$ before the split, writing a covered call option for 300$ and then seeing it's value now). This can occur with both volatile stocks, and non-volatile stocks. The only difference between the two is the value of the premium from the option, and the possibility of a large movement (and therefore, missing out on a big gain). One big caveat about the growth stocks: IF you buy and hold for purpose of writing options, it could drop a lot. That being said, GE isn't doing too well lately is it?
...aaaand your entire thesis founders on this point. IF you had magical foreknowledge of this sort, life would be very easy indeed. In real life, however, "growth stock" does not mean anything like "will go up quickly" without a corresponding likelihood of "will go down just as quickly", or possibly "crash to zero without ever going up". Past performance does not guarantee... stop me if you've heard this before, OK? The covered call strategy, like any other, works in some situations and not in others - so, just like any other, it can be criticized with "yeah, but here's how it can fail!" Frankly, this isn't very useful. But I also want to point out the inherent problem in this specific criticism: FOMO is neither a strategy nor a method of risk management. "You could miss out on maximum gains!" makes no sense on its own because that's a risk you've traded to get the benefits of CCs - a risk swap, if you will. The only meaningful question is, does this new risk scenario fit your concept of the market better or worse than just holding the stock (or some other strategy) does? For some people, the answer is "yes".
Would you pay a great premium for stocks that don't move much? If you want to sell cc look into the exact opposite stocks and analyze whether IV is overpriced for what is coming up in realized volatility terms for the stock
Oh I just got to share below excerpt (unfortunately I didn’t write down who said it): It is said “riskier investments provide higher returns.” But riskier investments absolutely cannot be counted on to deliver higher returns. Why not? It’s simple: if riskier investments reliably produced higher returns, they wouldn’t be riskier! The correct formulation is that in order to attract capital, riskier investments have to offer the prospect of higher returns, or higher promised returns, or higher expected returns. But there is absolutely nothing to say those higher prospective returns have to materialize.