If you always sell ATM Covered Calls, you will not recover if stock goes down?

Discussion in 'Options' started by crgarcia, Sep 11, 2009.

  1. If you always sell At The Money covered calls, you get more premium, but, when the stock goes down, you will not recover; as you always get assigned?

    Thus you must either sell OTM calls, or only sell covered calls, with a fraction of your entire account?
     
  2. wayneL

    wayneL

    Why would you get assigned if the stock goes down?
     
  3. I am confused.
     
  4. 1) You do not get assigned on out of the money calls. If the stock goes down, the ATM calls become OTM calls and there is NO CHANCE that you will be assigned.

    2) Selling OTM calls results in even larger losses than selling ATM calls. Thus this is a bad idea.

    3) Yes, writing covered calls entails some downside risk. Thus, it is important not to adopt that strategy with your entire account.

    4) But more than that, your question tells us that you do not understand what a covered call is - or how it makes or loses money.

    5) When you write a covered call, it is a very good result to be assigned an exercise notice.

    Mark
    http://blog.mdwoptions.com
     
  5. Sorry, I meant to say that you get assigned when the stock goes up again to recover.

    You cap your maximum potential to recover (go up).
     
  6. If you sell ATM calls with 1 year to expiration you might do OK if the stock inches up a bit.
     
  7. xraptorx

    xraptorx

    I think the Orig Poster meant to say that if the stock goes down in the current month, the options expire worthless. Then the next month you write new calls ATM and if they are called, it is possible you take a realized loss on the stock.

    digging yourself out of a hole by writting CC can be a long process. This is one reason you should only write CC on stocks you are happy to own - if the fundamentals are strong and you believe in the company with a price of $50, assuming nothing changes, then at $45 the picture looks even better. The problem arises if you get called at a strike less than your basis.

    I believe John Brasher from callwriter.com wrote once that it is better in most cases to sell (at a small loss) than to try to dig yourself out of that hole.
     
  8. Getting called on a covered call is the max profit you can make on the trade (ignoring dividends). You know that amount entering the trade. You only loose money if you enter a trade knowing max profit won't return your basis. If you think the stock is going to go down, perhaps covered calls aren't the right strategy.

    - Ray
     
  9. I doubt that John Brasher is an investor who believes in the company and is in it for the long haul :)
     
  10. Nobody may know if/when stocks may go down.

    However C. Calls give you some cushion if they indeed go down.
     
    #10     Sep 18, 2009