Covered Call Regret

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!