I understand that covered calls are a nice way to make money on stocks that you own. The strategy will work fairly well in a rising or sideways market. How about in a declining market? Is there a strategy similar to covered calls that will make money in a falling stock market?
Selling naked calls works in a declining or sideways market. But only on index options where your upside risk is not unlimited.
I think he isn't really looking for the "true" opposite of selling calls, but an equivalent of selling calls in a down-market, in which case covered puts would be the way to go, no? Short the stock, sell the puts. -FastTrader
:eek: I don't want to be a wet blanket, but I suggest a serious reading of "Characteristics and Risks of Standardized Options" available at any brokerage firm that trades options. Also, I quote a book on options, in part, "Selling puts: A put cannot be covered in the same way that a call is covered...." There is more to it than that sentence. I can tell you that if you go out on a limb on even a covered call and the bottom drops out of the underlying stock, you may never recover. My experience has proved that, regardless of what the experts claim about guaranteed options profits.
Covered options, whether puts or calls, are not meant to give unlimited protection on the down side. They require a stop loss on the underlying. The stop loss should not exceed the premium and rolling down is not generally profitable. They are suitable for consistent income in a reasonably balanced portfolio, i.e. 50% long/ 50% short in a flat market or say 66% long/short vs 33% short/long in a trending market with sufficient diversification of 50 to 100 issues. Don't believe everything you read ...
When you sell a covered option (call or put) you will guarantee income from the premium versus the possibility of a large capital gain. However, the only way to hedge your underlying position regardless of market movement is to buy an opposing option. So, while there is no such thing as a free ride here - the cost of the opposing option will either take up some, all or exceed the premium received. In the case of a downtrending market, selling a covered put will bring in more income than the premium to purchase a call option to cover an upswing. The only problem is that the small investor probably doesn't have the capital to make this spread worthwhile so he/she usually leaves the weak side open, bearing the risk. This is why brokers require that you read about the risks, so you can't come back and say that they let you do something that caused you huge losses that you didn't understand.
Agree. However realize that the protective option is going to cost you around 65% of your potential return. Utilizing a stop loss with proper diversification is significantly superior ...