This is Why I Love Covered Calls


I work full-time. Part-time trading is what I do. Time and risk are the two main reasons why the buy-write strategy and covered calls are ideal for me. I’ve been trading since the 1980’s. With my own money, I’m speculating and investing.

I found and fell in love with the buy-write strategy early on. It’s an approach I’m most at ease with. I work full-time, so I don’t have much time to check out the market and my holdings on a daily basis. My risk tolerance is a little low. That’s who I am.

What’s the Deal with Covered Calls?

There is no way to know for sure that you will be successful in trading. If you pick the right stock, you could make millions, but if you pick the wrong stock, you could lose a lot of money. Every time someone wins, someone else loses. The future is hard to predict. Everything is random and full of things we don’t know. So, a covered call strategy is not a “sure thing,” but it is a “safe” way for me to invest. It comes with the level of risk I’m most comfortable with.

The Ins and Outs of Covered Calls

Because I write covered calls on a monthly basis, I prefer to concentrate on the long-term trend. As a more conservative trader, I frequently write ITM calls to “secure” my income, because ITM calls offer more downside protection than ATM or OTM calls. On the other hand, ITM calls do not generate as much profit as ATM or OTM calls.

Furthermore, when a strategy fails, it can be repaired. I won’t go into great depth because I follow this strategy on Investopedia about Fix Broken Trades With the Repair Strategy

Traders can get two big benefits from selling in-the-money covered calls. They offer much better protection against losses and a much wider range of possible profits. The strike price of an In-the-Money (ITM) option is less than the market price. If you sell an ITM option, you will get more premium money, but your shares may be called away. Writing in-the-money calls is a good way for me to make money because I want a steady, moderate rate of return. The writer of the call option can only make money from the premium because he or she can’t make money if the price of the underlying security goes up.

Example of selling covered calls that are already in the money

The Downside of Selling Covered Calls

The covered call strategy is not a fail-safe way to trade. The covered call strategy has two risks. If the stock price drops below the breakeven point, the real risk is that you will lose money. The breakeven point is the difference between the stock’s purchase price and the option premium. Any strategy that involves owning stocks comes with a lot of risk.

The second risk is that you might miss out on a big rise in stock prices. As long as the covered call is still open, the person who wrote the covered call is required to sell the stock at the strike price. Even though the premium offers some profit potential above the strike price, that profit potential is limited.