March 31, 2018

Confessions Of A Covered Call Junkie

I've been trading covered calls for about three years, during which time I've made over three hundred trades. I've had my ups and downs and, as is true with any pursuit, my mistakes have yielded my most valuable learning experiences. The purpose of this article is to share some of my key learnings with other investors who are contemplating taking the covered call plunge.

The article is divided into two sections:

  • "Q&A" section that addresses aspects of covered calls which, based on comments I've read in previous SA articles, I believe are often misunderstood; and
  • "Tactics" section that describes the key tactics I employ in my covered call trading.

Covered Call Q&As
What are the risks associated with covered calls?

Risk #1: Lost upside.
Risk #2: See risk #1.
The singular risk associated with covered calls is the loss of upside, i.e. if the shares are assigned (called away), the option seller forgoes any share price appreciation above the option strike price. This represents money left painfully on the table. My approach to this is: Set a yield target at the time you enter into the covered call; if the shares are called away, congratulate yourself that you hit your yield target, and start looking for the next opportunity to make more money. Don't look back, other than to learn from a mistake.

(You may be able to delay or avoid assignment by "rolling" your position, which I'll cover later in the article.)


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