Many of us newbies, me included, started this way and you might as well try it out and see if you like it. Just be aware it is the same as a short put: Limited gain and unlimited loss (limit to underlying goes to zero). The most basic question you want to ask yourself is if I like a stock, why do I want limited gain? OK, you say, if called I will buy it back, rinse and repeat. What if after you buy it back it drops? OK you say, I will continue to sell covered call at a lower strike price. Then it recovers and you are called away at a price lower than what you bought it at.... And you also pay taxes on your gain. I still trade covered calls and cash secured puts but I don't do it mechanically to earn "extra income".
Here's your real issue. By selling covered calls,you are essentially setting a profit target(and reducing delta). In your case,your upside is limited to the percent out of the money plus the premium received.Lets just say your target is 25%. If you are setting a target(max profit),how much are you willing to risk on each trade?You appear to be buy and hold. I typically do not like to limit the upside without limiting the downside,and by limit I do not mean the stock going to zero...
When you sell a covered call, you have an obligation to deliver the shares if called at anytime before or on the expiration date. In addition, if the stock drops a lot beyond the premium you received for selling the call, you take a huge loss on it. You can buy back the option at any time before the expiration to close it out. If the stock goes down, you get to keep the premium as the covered call would expire worthless. However, if you bought XYZ stock at $20, sold a $2 call at $22 strike price. Then, stock drops to $15. You keep the $2 premium reducing your cost basis to $18 but, the stock is now just worth $15. So, you in effect suffered a $3 loss.
It's all about making money on long positions. Occasionally OTM covered calls are assigned when stock price raises and pass strike price. Then sell a OTM put and attempt to get assigned, strike price can be below CC assigned price. It's the old rental property analogy. But The whole position does not need to be in the CC, the remaining quantity can participate in the run up. Just like buying lottery tickets with pocket change, can't win unless you play. Buy and hold lol. If the dividend date is not with in range, sell CC. Remember first sentence. Bulls make money, bears make money, pigs get slaughtered.
its all about your strategy/goals/risk tolerance if your picking high growth stocks, I would never cap them, as you need the few breakouts to pay for some of the losers... if your trading index like spy, a 20% move in the next two years is inside the 1SD... now if your focusing on stocks like AT&T and other Dividend heavy stocks that dont grow as they are returning capital all the time, then its a little different as over 5yrs the stock has rarely moved so much in either direction, while also returning 6% in Div... so yeah go ahead and sell a two years out, as its just extra yeild ( for ATT the furthest out is Jan 2021 598 days, and Call 40 yeilds just under 2%..
Many growth companies do not pay dividend, no need to hold stock. Buy calls would work also if you're totally bullish. Use synthetic long, sell put , buy call. Remember you're bullish. And may the force be with you ...
What does a dividend have to do with whether or not you hold stock??? Im sure you know that the price of a call option is affected by the dividend rate...
But that has nothing to do with the dividend.... If vol is cheap/expensive,you want predefined risk or you think the skew is favorable,thats one thing,but I dont see how the dividend rate should factor in to whether or not you buy stock or get synthetically long.