Covered call is good for neural market. In the current downtrend and volatile market, it is one of the most riskiest strategies esp for investors not familiar with options. Listen to MTE's advice. He is one of the option traders in ET. I won't advise anyone to sell covered call in the current market.
"There are very few options strategies that are of value. They only belong in the hands of very experienced traders, and they do NOT involve straight puts or calls, long or short." I remember watching an order trade for 500 calls on the OEX on the 3 rd day of a 10 day bull run. I'm sure that trader would laugh at this statement.
If the stock drops CC will be a losing trade no matter what you do with the call. As MTE said CC protects some downside at the expense of the upside. 'Covered can work in all market condition' needs some clarification because what works for you might be a failure for others.
There is an aspect of writing covered calls that many traders overlook. When a stock is at the point when you are thinking of taking profits, writing a deep ITM call can bring you extra $ with little risk. The IV has to be high enough so that the premium pays a good return for tieing up your capital for the months until expiration on the call.
In order to justify the risk your stock should be sitting on the nice profit already by the time you write the call. Otherwise the loss would be comparable with the risk and can't be qualified as 'little'. To get to this point of considerable profits for your stock I guess you had to buy it with no calls protection. And that by itself involves risk.
Chrismontez, I definitely agree. Trading calls and puts should be part of one's arsenal as well as covered calls, vertical spreads, etc. Why should you limit yourself from opportunities out there? A couple of months ago when CROX gapped down, the option for that month went up $2,800 in one day! I don't recall the exact value of the put but, it was relatively cheap as CROX was going up day after day by leaps and bounds. This bear market shows why puts and calls should be part of one's quiver of arrows. While, the calls were being killed in a matter of speaking, if you were short the stocks (via puts ) that have been dropping----you would be making money while, everyone else long stock bled. I know the mutual funds in my 401K took huge hits while, I managed to make some money from my puts in my regular account. To each his own. I am content to match the option strategy to the market conditions as it is. Virgil
If you go really deep in the money IV becomes irrelevant really. All you are getting is a little bit of time value premium which may not really compensate for tying up the stock + short call position for so long and capping all upside movements. If you are thinking of taking profits, take the profits. If you think you might get some more upside movement, then add a protective put or replace the position with a call depending on how much profit you have. But adding a deept ITM call to a profitable position squeezes out a little more in exchange for locking it up for months and taking away all upside profit potential. Just not worth it really for deep ITM.
Well I guess that depends on what you think is a good return on your $. If your exit strategy was to sell your stock when it hit $30 and you can sell an ITM call that would give you an additional 10% return, I don't mind tieing up my $ at a 10% return. I've got cash sitting in accounts that pay me less than that now.
Where are you finding tickers in which the itm calls are netting 10%? $3 in extrinsic premium on an itm call on a $30 stock? What duration, Mar 2011?