Nik, we're not writing a book here. Searching is fine, but usually incoherent at ET. BTW. It's st. pauli -- and lots of it.
I edited out the snarky comment about 10 minutes ago, before I saw your post. But see the post above. This took 5 minutes and the OP could already be learning instead of waiting around here for us to finish our debate.
Actually, he would have $1900 left, not $1700. He would lose $2 on the stock but make $1 on the call.
Yes 1) Unlimited downside risk 2) Possible loss of dividend if option owner exercises call the day before the stock goes ex-dividend. 3) Potential failure to sell stock at a good price. If stock rises above strike, you will be unable to sell when you are short the call. YOU WILL NOT BE ASSIGNED PRIOR TO EXPIRATION and without the call, you may have sold stock when it reached your target price. Mark http://blog.mdwoptions.com/options_for_rookies/
In a nutshell, you do not want to sell covered calls unless : a) you are planning to hold your position long-term. (at least until the day of expiration). b) You sell out of the money covered calls at a strike price where you would actually feel comfortable shorting the stock outright. So, if you buy a stock at 35, you plan to take profits at 45 and you sell the covered call at the strike price of 50. In this scenario, I am assuming your covered call becomes the naked call since you are taking profits on your stock before expiration. In general, it feels that selling covered calls is not ideal for the kind of market environment we are having now. It is more suitable for low-volatility bullish environment. Is that right ? Thanks.
Actually covered calls is a good strategy in a bear market for someone who wants to buy and hold. Plus volatility means higher premiums. For a new investor with a 10-20-30 year outlook I would just buy one or two lots of SPY and sell a near month covered call 2 points OTM and save the premiums in a savings account or you can buy additional shares of SPY with the premium and reinvest the dividends etc.. paid out by SPY. the power of compounding will eventually pay nicely, and if you get assigned you can decide to write cash secured puts ITM or 1 point OTM near month or just rebuy and write again. SPY represents the S&P 500 and provides diversification and your calls provide the hedge. You will outperform those fancy hedge funds Also on another note your best bet is to just stick to SPY and not try to time the market or beat the market. Dollar cost average over time, buy SPY on a monthly basis (Same dollar amount) and write your calls.
Let's assume for the moment that I do not want to buy the SPY and instead just sell the calls as described above. How well would I do with that strategy over a 10-20-30 year time frame?
Obviously that depends on how much higher the market moves. Down moves are good for you, so the amount of any decline doesn't matter.. On average, this strategy should be a loser, IMHO. There are always bull markets and you wold get hammered enough to offset your gains. I'm sure you can backtest this method. Data is available. Mark