Covered call is the most popular options strategy of all times but it is also the cause of many regr
Most beginners to options
trading start out with something known as the Covered Call. Covered Calls
are simply writing out of the money call options on stocks that you own. This
gives the buyer of those call options the
right to buy the stocks from you when the strike price of the call options are
reached. The benefit of doing so is that if the stock does not move enough, you
get to keep the premium earned from selling those call options, make an
additional profit and still keep the stocks. Even if the stock should go down,
the position is protected up to the amount that the call options are sold for.
For example, you own ABC stock trading at $50 now. You wrote a Covered
Call by shorting the $55 strike call options for $0.75 per contract. Now, if
ABC stocks goes up to $54, or any price below $55, you not only profit from the
stock gain but at extra $0.75 per share on the covered call too. If ABC stocks
drop by $0.75, that drop would be fully offset by the $0.75 of the call options
wrote.
See the beauty? Covered Calls make stocks that profit only when it goes
upwards into an options trading position which profits when the stock goes
upwards, stays stagnant and also gives protection downwards! Wow! Who is ever
going to regret doing something like that?
Well, here’s the thing.
Most beginners do Covered Calls only because of a lack of confidence in
the stocks they picked! They picked and bought stocks that they fully expect to
go up but is worried about not making money if the stocks didn’t move as
expected. This is the primary motivation for beginners to Covered calls so far.
Almost no beginners to Covered Calls are willing to let their stocks get called
away like veterans do. Veterans to Covered calls understand the maximum static
and assigned profits and are ready for assignment but not beginners.
What most beginners to Covered calls experience is regret, what I call a
Covered Call Regret, when the stocks they picked DO rally fast and goes way
past the strike price of the call options shorted. They then panicked because
they are going to lose such a great stock and regretted that they did not make
any money beyond the strike price of the call options. See?
Covered Call regret happens to almost every beginner because they do
Covered calls not wanting to be assigned in the first place! Assignment for the
maximum assigned return is a favorable scenario in Covered Call writing and
produces the Covered Call’s greatest profit potential and all veterans know
that they do not expect any gains beyond the strike price of the call options
shorted if the stock rallied. Most beginners do not have this part of the story
in their mind. All they wanted was the protection and not the assignment.
This is also why veterans don’t normally do Covered calls on stocks that
they expect to rally strongly!
Most, almost ALL, beginners do Covered Calls on stocks they think will go
up strongly! Why? Because they won’t buy stocks that are not going to rise! And
then they let fear of not making money or losing money lure them into a Covered
Call position which they regret for later. One of the most common mistakes in a
bull market are those who loved AAPL but placed Covered Calls on it. So much
regret.
Next time you put on a Covered Call, be prepared for assignment. Being
assigned is the Covered Call’s way of making its maximum profit which you could
determine before hand. If the maximum profit doesn’t look good enough for the
outlook of the stock, then don’t use a Covered Call!
