Covered Call Strategies

Discussion in 'Options' started by bob2007, Apr 18, 2020.

  1. bob2007

    bob2007

    I was just thinking that since I am a swing trader....

    Wouldn't it be a good strategy to do covered calls?

    e.g.
    I want to hold stock X. For two weeks. Price $100.
    I will not sell it until the price is $120.
    I can sell a call option 2 weeks Strike price $120.

    Isn't this strategy better than just buying and holding the stock?
     
    never2old likes this.
  2. Girija

    Girija

    If price moves south you have a risk. There may also be dividend risks. It is an option used in long term buy and hold to collect rent.
     
  3. bob2007

    bob2007

    Thanks for your reply. The dividend risk, what might that be?
    If I am selling a call option.
     
  4. never2old

    never2old

    stocks/ETF with dividends likely have less option premium.

    an example only for reference & information purposes only.

    lets take a wild card pick NCLH at $12.50 last. Buy the stock sell a DITM covered call at $5 strike price expiring Jan 2021, pays $8.80 last Friday 17 April

    https://www.barchart.com/stocks/quotes/NCLH/options?moneyness=allRows&expiration=2021-01-15

    $5 + $8.80 = $13.8 - $12.50 = $1.3/$12.50 = approx 10.4% with downside protection to ($5-$1.30) = $3.70

    10.4% for 9 mth trade is ~13.86% annualized.

    or what about a Jan 2021 expiry vertical call spread 5/10 cost $2.43 max loss. $5 spread - $2.43 cost = $2.57 potential profit on an investment of $2.43 = 105.7%
     
    bob2007 likes this.
  5. never2old

    never2old

    if you buy a dividend stock & option ATM or ITM, your option is exercised before ex-dividend date ... no dividend
     
    Last edited: Apr 18, 2020
    bob2007 likes this.
  6. Atikon

    Atikon

    Why not sell a put if you are certain that it will move up? An option is more valueable the closer it is to the strike price
     
  7. never2old

    never2old

    good point.

    especially on the NCLH mentioned above on the premise the stock will go back up

    OP an example again Jan 2021 expiry the $5 put will pay you $1.60 option money last

    https://www.barchart.com/stocks/quotes/NCLH/options?moneyness=allRows&expiration=2021-01-15

    potential loss to zero $5 - $1.60 = $3.40