I have done covered calls for over 25 years. I enjoy the income it can provide, while having very little downside (depending of the stock). I choose the most stable stocks I can find. They should be an industry leader. I am going on 67 years old...I may not be able to buy back my option, if something happened to me (long story, don't need to get into it). I saw this on Yahoo Finance and thought it laid out a simple/basic concept of why and how to use covered calls for income. I will very seldom hit a home run with these options, (except for rich premiums options like Apple or Budget/Avis). I just enjoy generating income. I get ripped on these boards by the day traders for this concept. I have learned to just let it slide off the shoulder...We are apples and oranges when it comes to trading. Below is the article... Exxon Mobil (XOM) is currently one of the top yielding S&P 500 stocks. So far this year, the integrated oil and gas titan is sharply outperforming the S&P 500 with a year-to-date gain of 49%. Exxon stock is also above rising 21-day and 200-day moving averages, but slightly below the 50 day. According to IBD Stock Checkup, XOM stock ranks No. 5 in its group and has a Composite Rating of 95, an EPS Rating of 80 and a Relative Strength Rating of 95. Investors searching for yield can further enhance the yield on stocks such as XOM by using a covered call strategy. When selling a covered call, the investor receives a premium and has an obligation to sell the shares at the strike price if called upon to do so. One call option contract represents 100 shares, so investors can sell multiple call options if they have a particularly large stock holding. Over time, covered calls have the potential to increase returns while also decreasing the volatility of a portfolio. On Exxon stock, a Sept. 16-expiring monthly call option with a 92.50 strike price recently sold near $2.70. Selling this call option would generate $270 in premium per contract and increase the annualized yield by 30%. XOM currently pays around $3.52 in annual dividends per share. So generating another $2.70 from covered call writing in less than six weeks is quite attractive. A Buffer The $2.70 in premium received also gives a small buffer on the downside of almost 3%. That means Exxon stock could trade 3% lower between now and Sept. 16 and the covered call trade would still break even. The total capital at risk in the trade would be $8,789; if XOM went to zero, that's how much the trade would lose. Please view covered calls as a fantastic way to generate extra income from a stock holding while also providing some downside protection. Investors would need to weigh the pros and cons of even a blue chip such as Exxon stock before initiating a bullish trade like a covered call. Remember that options are risky and investors can lose 100% of their investment.
It's not quite that simple... and after 25 years, you know that. But that's the dirty little secret of CCs that their proponents never want to talk about. If they're "stable" and "industry leaders", their volatility (and thus premium) is going to be total crap. If their premium is not crap, then there's something going on - because you're being paid for taking risk. If there's no, or less risk, then you're not going to get paid. And this is the way the CC hype always goes: "OMG! Look at this stock during this past month! Aren't CCs amazing?” The implication being that CCs always work this way. They don't. [shrug] So would anyone - if it was possible. It's not. When that CC goes against you, as some definite percentage of them absolutely will, you're going to deal with losses. That's an unalterable fact; nothing to do with "ripping" you. It's just basic to any kind of trading, that's all. (Good general rule of thumb for trading info/education: if they mention "income", run.) [QUOTE]Exxon Mobil (XOM) is currently one of the top yielding S&P 500 stocks.[/QUOTE] Yep. That being the key word - hindsight being 20/20 and all. Good luck finding stocks like that ahead of time, when it actually matters... BTW: CCs are synthetically equivalent to short puts - which pay a bit better for the same delta due to skew. Same type of "income", same exact risk profile... and the same bad idea in anything but a bullish-to-sideways market. Just another key item that CC promoters always forget to mention...
I'm not sure what you're rambling on about, but Timing is everything, for everything. 99.2% of the people on this site essentially lose 100% of their investment. There is no safe, conservative, strategy....or medium strategy....or high risk/reward strategy....if your timing and understanding of the future is completely off. Your trading account and performance record will look like a Big Mac thrown out of a car on the highway.
The dividend is embedded in the structure, so no point in discussing it unless you're in LEAPS and expecting a massive div-risk (up/down). XOM out to Jan23 is paying 7% here if called on the Jan 90s. As an aside; I am up 6% for the week at half index beta. It's an inferior strategy that you take sht for, yet you can't wait to open yet another thread on CC.
I'll do a 10 minute reply...Don't want to go heavy into details, I have better things to do. You are correct concerning industry leaders that can go south (GM, GE 2008-10). But I still would not mind holding things like Apple even in a recession, if it had dropped 20-30%...Wait for a recovery. The same with QQQ...As I speak I can buy it at $324.50...I could then option the Sept 30, $325. for about $12.50. Am I willing to hold onto QQQ through a recession?? I think so!! Would pension funds hold QQQ though a recession?? Yes...Not crazy at all. One of the keys for me is, "am I willing to hold this company though a recession"? The answer for the most part is yes. I can even play contra on stocks with recessions and inflation...Hold Target AND ADM. With inflation, ADM people will rush to it for safety. Will Target be there in and out of a recession?? You know the answer...I believe they even wouldn't reduce their dividend. ADM has (I believe) NEVER reduced their dividend. That is why ADM is so good year in and year out...Widow and orphan stock, great dividend, inflation protection. I am older...I do not have anyone to clear my positions if I were to die/be in a rest home (stroke). Do I trust the bank's trust department to clear/close my positions?? Would Schwab/Fidelity do it? Does Schwab hold a fiduciary responsibility toward me??? Different things come into play...That is all I am saying. As for the story...Take it up with the crackpots at Investor's Business Daily...
Here is the non-mathematical answer to your covered call fog. I'm fairly certain you are not ready to dive into the math since you have already made your mind up about the value of your strategy. But if you are willing to temporarily set your conclusions aside we could also take the mathematical approach. You aren't putting the odds in your favor by doing this. There is an army of math PhDs that are making a market in options and earning billions for the big banks they work for. This is who is on the other side of your trade. You didn't outsmart them in some clever way and create a conduit that siphons money out of their accounts and into yours. You bought the product they offered. Not the other way around. And they offered it because they make money on it. They aren't speculating. They're fishing for people who haven't done the hard work that they have.
A quick example (cutting to the quick)...Saying there is NEVER a place for CCs. Say we were in the middle of a recession. I (having the cash), were to buy QQQ, then do a covered call (leap), would that be wrong?? I would put my price in (about 1% lower than the bid/ask). I pick it up (the sky is falling). I quickly do a CC leap, just above the price that I bought it. Please shoot down this concept. Yeah, I know I will not get the upside...I am not looking for the upside. I am looking for the profit from the time decay from the leap (which is much better than what a current money market would give me). Yes, I know QQQ could drop another 20-30%...I am willing to hold onto it through a major recession. I'll write another covered call. Do you think some pension funds do this strategy?? I do not know the answer, but I believe some/many do (on a much larger scale). Yeah, I know, things like iron condors and butterfly spreads will be used. But, if your state's/municipalities' pension fund payment is due Jan 24, you better have assets to draw from (and a clean balance sheet) or it will not be pretty...
A quick read on public pensions and the mess they are in... https://www.google.com/url?sa=t&rct...nsion-funds/&usg=AOvVaw2x6lrJbEFN9k4dH6yTxhY6
Yes, that would be wrong. The leap is priced so the odds are not in your favor. Why is this question important?? Considering how underwater pension funds are they may very well do something like this. Please answer these questions: Do you understand that if you are not putting the mathematical odds in your favor that you will eventually lose money? If you feel you are making money on your covered call strategy then who do you think you are getting it from?
this argument applies to all trading for all market participants as everyone in the ocean has a shark chasing them.