You get limited upside but unlimited downside. Wouldn't it be less reckless to do a collar against the stock?
Collars[fences] are usually traded at zero-outlay and at least one strike otm. Even with a call skew they offer little value-add as a trading vehicle against a primary-position[long put/short call]. They're typically used as a means of hedging restricted stock. The position is a conversion or reversal arb if traded atm/same strike. Risk reversals[short fence] and conversions[long fence] are collars w/o the underlying stock position. Used to take advantage of the vol-smile through otm put or call skew; i.e., the trader is bullish and sells the 25d put at 20%vol while buying the 18%vol call. The 200 basis in edge would equate to roughly $.80 in edge.
Covered calls are one of the worst strategies for creating income. There needs to be net credit without any downside risk for a strategy to consistently be profitable.
"Covered calls are one of the worst strategies for creating income. There needs to be net credit without any downside risk for a strategy to consistently be profitable." Both are wrong. You just need to be right with your prediction.
This is incorrect. With naked premium, you can win with any direction. If predicting direction, you have to be right.
With naked premium, you will win if you predicted correctly that the stock would not move violantly. But you still have to be correct in your prediction.
False. This is why I love trading short options. There are very few of us who know that this type of strategy is the key to the kingdom. Most folks are buying options and we keep the premium. By the way, out of the money options without using up a large part of margin on the initial sale, giving yourself plenty of room to manage the position is the secret to success.
Thanks for letting out the secret! Don't you worry that no one is going to buy options from you anymore? You should have kept this secret weapon to yourself. But anyway, thanks for sharing.