There are ppl who write ITM covered calls or ITM covered puts. As I have just been pointed out by someone, it's actually a good way to make riskless profit but for directional play ONLY and there has to be an OVERWHELMINGLY STRONG probability that the price is going to move in the direction of the underlying position otherwise you are exposing yourself to high risk of high loss unless you choose to hedge but it's going to eat away at your profit and if you are going to hedge anyway then you might as well not write the option which would expose you to this loss risk in the first place. Good volatility play and you get to keep guaranteed amount of profit even if you are assigned in directional play ONLY. No covered call is not used to purchase a stock; it's used to sell a stock or get some income while holding the stock waiting for it to appreciate more in the future. Whenever you are covered, that means you already have the underlying, so no need for options. Writing a put is what you need to use if you want to purchase a stock at a specific price cuz when you are assigned, you get the stock. No I would not recommend this strategy to someone with minimal experience as there is a lot of calculation and coordination involved to make the spread and trying to salvage the situation when the underlying moves against you. Yes like I said it would eat into your profit. You would have to buy the call so when the underlying tanks, you are hedged but then again if you are going to buy the call anyway, WHY involve the underlying or writing the call? You are exposing yourself to risk of losses unnecessarily. no as there is very little technical analysis one can do on option prices. You are welcome. To me, covered writing of options is an inefficient way to capitalize on directional plays and a risky move for volatility play as it's fully exposed to adverse price movement. This strategy only works when the option price is over-compensating for the IV and chances of that happening is very slim nowadays as the market is very efficient or as I have mentioned before when you are stuck with a stock that's temporarily in the rut but have high upward potential in the future and you want to be there when the stock comes out of the rut and starts moving up again and in the mean time you want to earn some income by writing calls but then again you would still be facing the risk of having your stock being taken away from you when somebody exercises their option to take advantage of a high dividend. Hope these all helps.
The $1600 loss is no big deal. Giving up all the upside is a concern. Hence my comment from previous post "Once you try one you most likely will not trade them again."
Your example did not show CC has very little risk. If stock drops 10% Stock position alone loss = $1,924 CC Position loss = $1,594 It reduces the risk slightly but does not have "very little risk". If stock drops significantly, having a covered call on the position does not make it a small risk position. CCs are the same as naked puts, these are NOT very little risk positions. FB at $192.40 100 shares $19,240 Sell July13 195.00 call $3.30 Stock drop 10% Loss is only about $1,600
Your example shows the opposite. Covered call has very little upside and has all the downside of stock risk. Enron shareholders can attest to that.
Is your disdain because of the existence of the short put, or would you hold that strategy in similar regard? They're nice for buying into (what looks like) a bottom while IV is rising and lagging, though the short put makes a lot more sense....OTM liquidity / rights, single leg, hard to borrow, margin....
I have no issues with knowledgeable traders doing buy-writes or selling puts in broad based indexes, country ETFs or sector ETFs, when the goal is to take advantage of the expectation that they are unlikely to drop and vol is high. My problem is with the single stock risk on a security that someone took the time and effort to single out as part of a small portfolio of "best" stocks to own, then have that downside risk and very little upside. The math does not work for me. My other issues is with the common comment, "well if that stock trades down 10%, I really want to own it". Well, if any stock drops 10%, either the market outlook has changed or the profit potential of that stock likely has. You might decide that the stock down 10% is not the best short on the street as there has been a change. Only a long term acumulator of companies can make that statement and mean it, and even they change their mind. Buffet is no longer long IBM. He said he hopes it drops so he can buy more......oops.
OK ....... So there appears to be a slight disagreement on what "very little risk" is. But I can pretty well guarantee the OP's first covered call will be a bust - very little loss if any, very little profit if any. It will be such a disappointment he will most likely move on to some other option strategy.
Most likely the OP is just exploring and trying to learn various option strategies atm. There must be a lot of "information" on covered call out there cuz it's a well-known and popular strategy so he/she thought to ask some people to get the real deal on it.