Simple Covered Call Strategy

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
tacotacotacotaco
Posts: 3
Joined: Fri Oct 16, 2020 3:22 pm

Simple Covered Call Strategy

Post by tacotacotacotaco »

So, I've been an investor for a long time but I've only recently in the past year or so started learning about options.

One thing I've started to do is sell weekly covered calls on SPY, AAPL or TSLA. Basically every Friday afternoon or Monday morning, I sell covered calls that expire the following Friday. Tesla covered calls have been great. AAPL decent, SPY less so.

I just sold some TSLA calls at 475 for next Friday at just about $15.50 each. Tesla was around 447 at the time.

Anyway, my point is - each week I'm making 2-5% on TSLA just selling out of the money covered calls. Lately I look at TSLA and sell calls 5% above where it is to expire that week. So effectively if I get my shares called away, I made 7-10% that week. I would be happy with that, even if Tesla went up 20%. It is so volatile I am happy to lock in the weekly call profit even if I get called away. I recognize that TSLA could tank, but I figure even if it does by selling calls all along, I'm making money holding it.

I've only done it a few times but each time its been quite profitable and at least to my eyes pretty low risk. My goal is to sell options that don't get called. But if they do I just rebuy back Monday and sell another covered call for another 2-5%.

What am I missing here, because this seems like a pretty low risk way to make a decent return each week. I mean, with TSLA I could easily make a 100% annual return just selling weekly covered calls.
User avatar
LadyGeek
Site Admin
Posts: 66250
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Simple Covered Call Strategy

Post by LadyGeek »

Welcome! This may not be the right forum to ask your question.

We invest in the entire market using a long-term buy-and-hold approach with low cost index funds.

To get started, see: Getting started
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
123
Posts: 6380
Joined: Fri Oct 12, 2012 3:55 pm

Re: Simple Covered Call Strategy

Post by 123 »

tacotacotacotaco wrote: Fri Oct 16, 2020 3:36 pm ...What am I missing here, because this seems like a pretty low risk way to make a decent return each week. I mean, with TSLA I could easily make a 100% annual return just selling weekly covered calls.
There are some stocks that continue to go up regularly, until they don't, and often the market can turn on them very quickly leading to a substantial collapse in share price. Eventually there will be an absence of "bigger fools" at which time the share price will be "adjusted" by the market (to say it mildly). Historically there have been other stocks that "couldn't fail" that were held by true believers in the company, GE and Kodak come to mind. Those that are holding it at that time could reap some truely astounding tax loss harvesting opportunities. Perhaps you'll get to be one of those "lucky" ones. I'd rather never have situations where I can tax loss harvest.
The closest helping hand is at the end of your own arm.
superbobbyg
Posts: 12
Joined: Sat Sep 28, 2019 1:20 pm

Re: Simple Covered Call Strategy

Post by superbobbyg »

I have also been "playing" covered calls and cash secured puts. I aim for at least 1% per week and stick to a 1-3 week duration. You are not missing anything ...until you lose. Blue Collar Investor- Alan Ellman has some excellent books and a website for education and his website (charges) makes recommendations.
I think the biggest risk is that of missing out on gains should the price take off above your strike.
Personally I think TSLA is a bit too risky for an options play since any time the bubble could burst.

I have been using more cash secured puts in this lofty market on stocks that have decent dividends and would be ok with owning if play goes against me. PRU, UNM, SAVE-no dividend but tremendous option returns, F calls, TECK calls to name a few of my recent gambles.

Good luck.
Bob
inbox788
Posts: 7575
Joined: Thu Mar 15, 2012 5:24 pm

Re: Simple Covered Call Strategy

Post by inbox788 »

tacotacotacotaco wrote: Fri Oct 16, 2020 3:36 pmI just sold some TSLA calls at 475 for next Friday at just about $15.50 each. Tesla was around 447 at the time.
Let's say a few months ago, I sold some TSLA calls at 375 for at just about $15.50 each. Tesla was around 347 at the time. They got called away and I made 20%. What do I do now?
superbobbyg wrote: Fri Oct 16, 2020 3:59 pmI have been using more cash secured puts in this lofty market on stocks that have decent dividends and would be ok with owning if play goes against me. PRU, UNM, SAVE-no dividend but tremendous option returns, F calls, TECK calls to name a few of my recent gambles.
Comparing Covered Call Writing and Selling Cash-Secured Puts
https://www.thebluecollarinvestor.com/c ... unt-offer/
Valueinvestor2
Posts: 44
Joined: Sun Dec 01, 2019 6:25 pm

Re: Simple Covered Call Strategy

Post by Valueinvestor2 »

tacotacotacotaco wrote: Fri Oct 16, 2020 3:36 pm So, I've been an investor for a long time but I've only recently in the past year or so started learning about options.

One thing I've started to do is sell weekly covered calls on SPY, AAPL or TSLA. Basically every Friday afternoon or Monday morning, I sell covered calls that expire the following Friday. Tesla covered calls have been great. AAPL decent, SPY less so.

I just sold some TSLA calls at 475 for next Friday at just about $15.50 each. Tesla was around 447 at the time.

Anyway, my point is - each week I'm making 2-5% on TSLA just selling out of the money covered calls. Lately I look at TSLA and sell calls 5% above where it is to expire that week. So effectively if I get my shares called away, I made 7-10% that week. I would be happy with that, even if Tesla went up 20%. It is so volatile I am happy to lock in the weekly call profit even if I get called away. I recognize that TSLA could tank, but I figure even if it does by selling calls all along, I'm making money holding it.

I've only done it a few times but each time its been quite profitable and at least to my eyes pretty low risk. My goal is to sell options that don't get called. But if they do I just rebuy back Monday and sell another covered call for another 2-5%.

What am I missing here, because this seems like a pretty low risk way to make a decent return each week. I mean, with TSLA I could easily make a 100% annual return just selling weekly covered calls.
Selling covered calls far out of the money to make and additional 3-4% per year while buying and holding long term is a very effective strategy that will enhance “market returns”.

With that said owning Tesla is a sure way to lose money over the long haul. Sell that garbage.
bugleheadd
Posts: 327
Joined: Fri Nov 29, 2019 11:25 am

Re: Simple Covered Call Strategy

Post by bugleheadd »

I sold a 10/23 460 call for around $13-$14 yesterday too.

Just be wary tsla could drop back down to $300 any day. And surely the juicy premiums can't last forever?

As long as you don't put all your money into it, should be ok. You might have to bag hold the shares for a few years for it to recover
DJZ
Posts: 54
Joined: Fri Jul 03, 2020 6:42 pm

Re: Simple Covered Call Strategy

Post by DJZ »

tacotacotacotaco wrote: Fri Oct 16, 2020 3:36 pm So, I've been an investor for a long time but I've only recently in the past year or so started learning about options.

One thing I've started to do is sell weekly covered calls on SPY, AAPL or TSLA. Basically every Friday afternoon or Monday morning, I sell covered calls that expire the following Friday. Tesla covered calls have been great. AAPL decent, SPY less so.

I just sold some TSLA calls at 475 for next Friday at just about $15.50 each. Tesla was around 447 at the time.

Anyway, my point is - each week I'm making 2-5% on TSLA just selling out of the money covered calls. Lately I look at TSLA and sell calls 5% above where it is to expire that week. So effectively if I get my shares called away, I made 7-10% that week. I would be happy with that, even if Tesla went up 20%. It is so volatile I am happy to lock in the weekly call profit even if I get called away. I recognize that TSLA could tank, but I figure even if it does by selling calls all along, I'm making money holding it.

I've only done it a few times but each time its been quite profitable and at least to my eyes pretty low risk. My goal is to sell options that don't get called. But if they do I just rebuy back Monday and sell another covered call for another 2-5%.

What am I missing here, because this seems like a pretty low risk way to make a decent return each week. I mean, with TSLA I could easily make a 100% annual return just selling weekly covered calls.
I have been selling so-called “way out of the money covered calls” for many years now. I have not done a formal analysis, but my impression is that this strategy *seems* like free money, but in fact is about neutral or perhaps a slight loser.

The problem is that they are properly priced, or slightly underpriced, by the market (presumably because so many people like to do it).

The losses occur in the rare instance when the underlying stock price increases well above the strike price, and you don’t want to sell, so you must buy the options back at many times what you sold them for.
Last edited by DJZ on Sat Oct 17, 2020 9:50 pm, edited 1 time in total.
inbox788
Posts: 7575
Joined: Thu Mar 15, 2012 5:24 pm

Re: Simple Covered Call Strategy

Post by inbox788 »

DJZ wrote: Sat Oct 17, 2020 1:47 pm I have been selling so-called “way out of the money covered calls” for many years now. I have not done a formal analysis, but my impression is that this strategy *seems* like free money, but in fact is about neutral or perhaps a slight loser.

The problem is that they are properly priced, or slightly underpriced, by the market (presumably because so many people like to do it).

The losses occur in the rare instance when the underlying stock price increases well above the stock price, and you don’t want to sell, so you must buy the options back at many times what you sold them for.
The guaranteed loser used to be the trading commissions, spreads and fees. Per trade plus per contract? How much are you paying per trade these days? Which broker? The commissions are going to zero, but the costs are still going to be there and will be paid for one way or another.

Looks like most per trade fees are now zero, but there is still a per contract fee. Anyone charging zero for contracts or lowest per contract fee? Robinhood?
https://www.nerdwallet.com/best/investi ... ng-brokers
https://robinhood.com/us/en/support/art ... investing/

Zero sum game, less fees is negative expected return. Same as gambling casino.
invest2bfree
Posts: 68
Joined: Sun Jan 12, 2020 9:44 am

Re: Simple Covered Call Strategy

Post by invest2bfree »

tacotacotacotaco wrote: Fri Oct 16, 2020 3:36 pm So, I've been an investor for a long time but I've only recently in the past year or so started learning about options.

One thing I've started to do is sell weekly covered calls on SPY, AAPL or TSLA. Basically every Friday afternoon or Monday morning, I sell covered calls that expire the following Friday. Tesla covered calls have been great. AAPL decent, SPY less so.

I just sold some TSLA calls at 475 for next Friday at just about $15.50 each. Tesla was around 447 at the time.

Anyway, my point is - each week I'm making 2-5% on TSLA just selling out of the money covered calls. Lately I look at TSLA and sell calls 5% above where it is to expire that week. So effectively if I get my shares called away, I made 7-10% that week. I would be happy with that, even if Tesla went up 20%. It is so volatile I am happy to lock in the weekly call profit even if I get called away. I recognize that TSLA could tank, but I figure even if it does by selling calls all along, I'm making money holding it.

I've only done it a few times but each time its been quite profitable and at least to my eyes pretty low risk. My goal is to sell options that don't get called. But if they do I just rebuy back Monday and sell another covered call for another 2-5%.

What am I missing here, because this seems like a pretty low risk way to make a decent return each week. I mean, with TSLA I could easily make a 100% annual return just selling weekly covered calls.
Covered call is a bad strategy to implement. It does not protect you from downside and basically caps your upside. In a volatile market you will whiplashed and could be stuck holding the bag.

In March you had 10% down days and when stocks started rallying you cannot participate if you keep doing it.
ivgrivchuck
Posts: 131
Joined: Sun Sep 27, 2020 6:20 pm

Re: Simple Covered Call Strategy

Post by ivgrivchuck »

tacotacotacotaco wrote: Fri Oct 16, 2020 3:36 pm
What am I missing here, because this seems like a pretty low risk way to make a decent return each week. I mean, with TSLA I could easily make a 100% annual return just selling weekly covered calls.
If you play a game where you put $100 in, and you have 99% chance of winning $1 each round, and 1% chance of losing it all. It may look and feel like a really good deal for a really long time. Until suddenly it doesn't.

Now, I admit that the game that you are playing doesn't exactly work like that, but the underlying mathematics is around the same. You are pocketing small profits consistently until you miss out a really big win, because you sold a covered call, and you are still subject to a full downside risk of that stock.

Buying and selling options is all about estimating and analyzing probability distributions. I seriously doubt that you can in the long term win that game against the top pros who have all the historical data, know-how and access to the latest algorithms.

Do whatever you want, but it's a very good time to leave the Casino when you have been lucky and beaten the odds by luck.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
BogleFan510
Posts: 105
Joined: Tue Aug 04, 2020 2:13 pm

Re: Simple Covered Call Strategy

Post by BogleFan510 »

I lost huge upside on two of the best performing stocks of the decade by writing out of the money covered calls, losing the shares on a big up move, and deciding they were too expensive to get back in. Fortunately I only wrote calls on like 75% of my shares, but it literally cost me over a million in unrealized gains. Both were 30-50x baggers over a 10 year plus period.

Those small incomes from expiring ones seemed great at the time. Realize that options are lottery tickets and priced efficiently. You might just be selling a winner.
DJZ
Posts: 54
Joined: Fri Jul 03, 2020 6:42 pm

Re: Simple Covered Call Strategy

Post by DJZ »

inbox788 wrote: Sat Oct 17, 2020 1:59 pm
DJZ wrote: Sat Oct 17, 2020 1:47 pm I have been selling so-called “way out of the money covered calls” for many years now. I have not done a formal analysis, but my impression is that this strategy *seems* like free money, but in fact is about neutral or perhaps a slight loser.

The problem is that they are properly priced, or slightly underpriced, by the market (presumably because so many people like to do it).

The losses occur in the rare instance when the underlying stock price increases well above the stock price, and you don’t want to sell, so you must buy the options back at many times what you sold them for.
The guaranteed loser used to be the trading commissions, spreads and fees. Per trade plus per contract? How much are you paying per trade these days? Which broker? The commissions are going to zero, but the costs are still going to be there and will be paid for one way or another.

Looks like most per trade fees are now zero, but there is still a per contract fee. Anyone charging zero for contracts or lowest per contract fee? Robinhood?
https://www.nerdwallet.com/best/investi ... ng-brokers
https://robinhood.com/us/en/support/art ... investing/

Zero sum game, less fees is negative expected return. Same as gambling casino.
I get 100 free trades at Vanguard. Agreed, commissions would make these much worse.
User avatar
CardinalRule
Posts: 473
Joined: Sun Jan 15, 2017 11:01 am
Location: United States

Re: Simple Covered Call Strategy

Post by CardinalRule »

inbox788 wrote: Sat Oct 17, 2020 1:59 pm
Looks like most per trade fees are now zero, but there is still a per contract fee. Anyone charging zero for contracts or lowest per contract fee? Robinhood?
https://www.nerdwallet.com/best/investi ... ng-brokers
https://robinhood.com/us/en/support/art ... investing/
I can tell you which is my worst online broker in this regard - Wells Fargo Advisors. Free online equity trades, but options cost $5.95 + $0.75 per contract. And you had better not have anything assigned, or you will be hit with the full "agent-assisted" equity-trade commission of $25.00. I found out the hard way about the $25.00 when I sold a covered call on 100 shares of DIA (SPDR Dow Jones Industrial Average ETF) earlier this year, and it was exercised.
Topic Author
tacotacotacotaco
Posts: 3
Joined: Fri Oct 16, 2020 3:22 pm

Re: Simple Covered Call Strategy

Post by tacotacotacotaco »

bugleheadd wrote: Sat Oct 17, 2020 12:58 pm I sold a 10/23 460 call for around $13-$14 yesterday too.

Just be wary tsla could drop back down to $300 any day. And surely the juicy premiums can't last forever?

As long as you don't put all your money into it, should be ok. You might have to bag hold the shares for a few years for it to recover
I'm not - most of our investments are in SPY and a few fixed income funds. The TSLA stock is less than 5% of our liquid investments. We have a 40+ year remaining lifespan so I'm fine waiting if things go south for a while.
Topic Author
tacotacotacotaco
Posts: 3
Joined: Fri Oct 16, 2020 3:22 pm

Re: Simple Covered Call Strategy

Post by tacotacotacotaco »

DJZ wrote: Sat Oct 17, 2020 9:52 pm
inbox788 wrote: Sat Oct 17, 2020 1:59 pm
DJZ wrote: Sat Oct 17, 2020 1:47 pm I have been selling so-called “way out of the money covered calls” for many years now. I have not done a formal analysis, but my impression is that this strategy *seems* like free money, but in fact is about neutral or perhaps a slight loser.

The problem is that they are properly priced, or slightly underpriced, by the market (presumably because so many people like to do it).

The losses occur in the rare instance when the underlying stock price increases well above the stock price, and you don’t want to sell, so you must buy the options back at many times what you sold them for.
The guaranteed loser used to be the trading commissions, spreads and fees. Per trade plus per contract? How much are you paying per trade these days? Which broker? The commissions are going to zero, but the costs are still going to be there and will be paid for one way or another.

Looks like most per trade fees are now zero, but there is still a per contract fee. Anyone charging zero for contracts or lowest per contract fee? Robinhood?
https://www.nerdwallet.com/best/investi ... ng-brokers
https://robinhood.com/us/en/support/art ... investing/

Zero sum game, less fees is negative expected return. Same as gambling casino.
I get 100 free trades at Vanguard. Agreed, commissions would make these much worse.

I think I'm paying 50 cents a contract at eTrade. I'm trading 1-5 contracts here, this is not big $ investing and not a big % of our overall pot.
000
Posts: 2667
Joined: Thu Jul 23, 2020 12:04 am

Re: Simple Covered Call Strategy

Post by 000 »

Unless you're actually willing to sell permanently at the strike price, what do you plan to do if it keeps going up?
Post Reply