Covered calls

Discussion in 'Options' started by fogut, Jan 9, 2009.

  1. fogut


    I am wondering if there is any disadvantage of selling covered calls other than the fact that you are giving up the potential upside after the strike price. However, that can happen even if you simply take the profit at your desired price.

    I am fairly new to the options' world. Are there any other disadvantages that I may not be aware of ?

    Thanks very much.
  2. covered calls = long stock-premium.
  3. how about if the stock tanked to zero ? :confused:
  4. ptrjon


    Lack of liquidity is a downside. You're generally locked into your position unless you want to take an additional loss. In an ideal world, you'd sell the call, and buy it back on the expiration friday.

    Here's a very realistic example of a non-ideal situation:

    Let's say you buy GE at 20 and sell a 20 call for $2. GE then goes down $2. Your shares are now worth $18 but your option is worth $1. It doesn't expire for another 2 weeks.

    Now if you believe the stock will continue going down, you've kind of bet against yourself. Afterall, being long on a stock is bullish, and selling a call is bearish.

    So you can sell the shares and buy back an option which has no "real" value, only time value- in this case, you would end up with $1700 when you started with $2000. If you had simply bought and sold the stock without the option, you would have had $1800 left.

    The other option is that you can ride it out, holding onto a stock that you would just like to get rid of, for the sake of the $100 option you don't want to buy back. If the stock does indeed go down, you would lose more.

    When you enter a position, you have to realize that buying back the option early may cost you.
  5. timbo


    ... and the downside is?
  6. The subject of covered calls has been discussed here about 50 times. Lots of new traders have asked this exact question and have received detailed answers. 2 minutes of searching using 'covered calls' as a title search will bring up all the results you need. Please review them and then get back to us with your findings.
  7. timbo


    Nothing wrong with reinventing the wheel. Would you prefer the OP bring up an 8 y/o thread?
  8. ptrjon


    The OP probably wouldn't have posted if they read all the info on the forum involving covered calls. Basically identical threads just clutter the forum.

    In defense of the OP, searching the forum is tedious, and it's sometimes difficult to find the info you're looking for.
  9. Huh?? The discussion was being carried out in a thread last week! That's why I posted.

    You think he'd have to go back 8 years to find a thread on covered calls?

    Doing this by searching will bring up the information, plus the process of reading through threads where newbs ask questions about covered calls will give him a bunch of other info that he can use. When he's done, he can start a thread requesting whatever clarifications he needs. It's a better way to use the site for what he needs.
  10. These are all within the past year. Yes, it was extremely difficult to find them.

    The second last one deals with the idea that most newbs don't get, the one brought up in Market Wizards - that is, the position is the same as a naked short put position, in terms of the risk. The last link below is for a thread that seems quite long. There's probably some good info there.

    EDIT: Just looked at the first 10 posts in that last thread, it's exactly what the OP is looking for.

    Good one
    #10     Jan 10, 2009