People usually do covered calls on shares that they already own so to have a bit of profit when the stock is in a temporary downtrend while waiting for the stock to turn around. If you were going to cover the short with stock, I would buy the stock at the same time when I short when the stock price is still low so that way there is no risk of not being able to cover due to the stock price potentially gapping up past the strike price. By the time that the short call is about to be ITM, the stock price has already appreciated so much so even if you were still able to buy the stock below the strike price the profit from the assignment would be much lower vs if you had bought the stock earlier when the price was lower. Why make a small profit when you can make a bigger profit on the underlying if the stock moved up? If you never wanted to buy the stock and just wanted to short options for the premium, then might I suggest you to buy the call instead to turn the naked short into a spread. That way you have covered the naked short and you won't have to deal with the risk of buying the stock only to see the stock price turn south against you and you lose even more on longing the stock. Anyway experiment a bit, do a small position and see how it works.
I don't know if any of these are good examples...If memory serves me correct; Didn't Robinhood limit what options people could trade when Me Me stocks were hot...GameStop and AMC? Didn't IB lock up a few times in the last few years when the market was very active? I know better safeties are in place, but my mind goes back to the 1987 market. https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwjh-c6b7rz-AhX6NEQIHZYFBScQFnoECEMQAQ&url=https://en.wikipedia.org/wiki/Black_Monday_(1987)&usg=AOvVaw3xT6npCO2c7zlTcVqMmSE4 Lastly...Am wondering what a bank crisis would do?? Eyes wide open...
Dawnster,what is happening here By definition,covered calls is on stocks they already own.. Short stock????
Not bashing,illustrating what a terrible strategy it is... Sells naked calls for goober,doesnt manage his risk(delta hedge/close short call),then picks a completely arbitrary point to not only hedge a 50 delta call option,but overhedge and turns a bearish position into a bullish position,i.e short put. Aa one poster illustrated,its steamroller city
What overhedge or a short put are you talking about? The amount of underlying will correspond exactly to the number of calls (*100). Also not sure why are you assuming the potential gains will be low. I won’t be selling index or MSFT options …
think about your strategy,and you have already mentioned the inherent risks you sell a cheapo call,lets say 10 delta..What percent of notional do you take in ( call/stock price) stock runs up to the short strike,short call is now ATM,50 delta. for some reason,you are choosing to buy 100 shares against a 50 delta option... So at strike,you will own 100 shares against your 1 short ATM call. Long stock + short call = short put How can the gains not be low. You sold a cheap option,never hedged till at strike. If you do as you stated,you will have sold a put for close to zero(premium on short call) Best case scenario,stock sit still/goes lower, and you collected tiny premium on the short call.. Terrible execution
You are thinking at expiration. By the time you get there, price whipsaw could come against you for more than the tiny credit you take.
They are thinking as options (volatility) traders, and your strategy is a directional one. I prefer to do the opposite, sell calls at strikes where I would want to be short, but as I said the light isn’t worth the candle.