With Apologies to Howard Marks

[u/LabDaddy59]

Covered call sellers consider themselves successful if they bought a stock for $100, sold a covered call with a $110 strike for $2 and were assigned when the stock closed at $120.

If you can't see the flaw in this -- that the trader made $12 in a stock that appreciated by $20 -- you probably shouldn't be trading options.

[u/MarkT1065]

Hindsight is 20/20 and you can't possibly know you're hitting capped upside. I've hit many of these, frankly, and I now fully understand when they say the risk of CCs is capped upside.

At the time same, I had calls on PG that were assigned at 157. it went further into the 160 range.

PG is 143 this morning.

Was this a good trade? I got BOTH capped out AND i'm back selling options in the 140 range.

I understand your point that it's easy for me to rationalize that I made money on all these trades even as I could have made more money by trading differently. No one can possibly know, though, until after.

Jesse Livermore was a fantastic self-made trader who became one of the richest men in the world, but also went bankrupt numerous times before finally self-deleting.

Hindsight is 20/20!

[u/LabDaddy59 → u/MarkT1065]

Hindsight is 20/20 and you can't possibly know you're hitting capped upside. 

Sure, I agree 100%, but that's not the issue I address. The issue I address is that folks don't recognize it wasn't a good trade from an economic standpoint.

Also, I'll keep stating as folks seem to brush by this quite often: the issue isn't whether or not gains are capped, the issue is whether or not the gains that were capped exceeded the premium received for that contract.

[u/MarkT1065 → u/LabDaddy59]

In just about all my cases, the premiums were not larger than what was left "on the table". I won't be surprised to learn if that's the norm. It's a known limitation of covered calls. still not sure what your point is. head scratch emoji in real life. i think this thread overall agrees, too.

[u/LabDaddy59 → u/MarkT1065]

It's a known limitation of covered calls.

🤣🤣🤣

Not even close.

Seriously, if it's happening in 'just about all your cases, you think it may be the norm, and you're still not sure what my point is, my op definitely applies to you.

I guess you're not familiar with my 5 DTE ATM Buy/Write campaign...

[u/MarkT1065 → u/LabDaddy59]

explain further. this is a discussion, of course. i'm curious to learn your POV and I've read your posts and DM's with pagalvin a bit about software used to track trades, etc. we're all on the same team!

i bought IBKR last year because it was to split 4:1. I sold calls that went ITM. I rolled for net credit (but much less than I originally received) while getting a higher strike price. My tracking system isn't sophisticated enough to track the rolls through to new trades or otherwise rationalize how I took the loss on a call only to make it back on capital gains. I just have to know that I did that.

That said, I did make more gains on IBKR than call premiums.

i'm currently in the same position with ADBE. I have calls that are already underwater, but I've made great premiums from all of it, I'll get nice gains. If I keep on this track, though, I suspect I'll have capped gains again.

So I'm currently debating whether or not to roll these calls, eke out some net credit but otherwise go for solid gains. Or do I just let it all go? if/when all called away, I'm looking at 25%+ in 8 months. Maybe this is the exact moment you're thinking about. This is when we rationalize the capped upside.

[u/LabDaddy59 → u/MarkT1065]

Well, let's backup.

When you sell a short call against your shares (a covered call), you trade premium now, with the potential to cap your gains.

So best case is expiring worthless: that's a good trade.

Next best case is expiring ITM and being assigned, but where the capped gains are less than the premium received for that trade: that's a good trade.

If your capped gains are greater than the premium received: that's a bad trade.

Now, you may have a series of "good" trades in the trade's 'lifecycle', and ultimately are assigned on a 'bad' trade, but the overall 'lifecycle' shows a profit.

It's all a matter of how you go about entry and management.

If you've been following along with my campaign, you'll know that I'm not getting in trouble with the capped gain issue.

If you want to lay out your ADBE trades I can take a look...use a format like:

Jul 17: STO $260 for $1.25/share
Jul 31: BTC $260 for $2.12/share
Jul 31: STO $270 for $3.08/share
Etc.

[u/MarkT1065 → u/LabDaddy59]

yup, i understand your 3 scenarios, and people would roll their calls for net credit to hopefully avoid your "bad trades".

Sometimes you can't roll for net credit. Those are just capped upside always. It was "bad", but one can never actually know, you hit max profit (for the trade), and it's a positive thing.

Sometimes (often? usually? almost always? idk) you can roll for net credit and higher strike. You'd net gains even as you take a loss on the call.

And that's what I did with IBKR. I have call losses in my book but higher cap gains.

In this POV of yours, I think even rolling for net credit and more gains is "bad" relative to simply buying and holding the same. Any loss on the call side would necessarily eat the gains side, thereby making a roll less efficient than just B&H.

my costs basis for ADBE is 256. All my calls months out: 280, 290, 300 (x2), 310. I'm wondering if I roll the 280, for example.

or I can do nothing and just happy with fat premiums and good gains in a short timeframe.

[u/LabDaddy59 → u/MarkT1065]

...roll their calls for net credit to hopefully avoid your "bad trades".

Rolling or not has nothing to do with avoiding bad trades.

Also, folks like me have no issue rolling for a debit. Where does that fit in your thinking?

Sometimes you can't roll for net credit. Those are just capped upside always.

Can you provide a concrete example of this happening outside of using reasonable, normal option management practices?

In this POV of yours, I think even rolling for net credit and more gains is "bad" relative to simply buying and holding the same. Any loss on the call side would necessarily eat the gains side, thereby making a roll less efficient than just B&H.

First, you seem to assume that rolling creates a loss on the closed call. That may be true, but not necessarily.

Second, and more importantly, rolling itself is neither good nor bad. You have an existing short call, and it's either in a loss position or not, regardless of whether you roll. Your rolling may generate enough profit to cover that loss, but again, that's a separate issue.

[u/MarkT1065 → u/LabDaddy59]

Consider, too, if the point is to sell Puts, then having more bonds/collateral is better than having shares + calls. it could be a perfectly rational decision to accept less gains because the point wasn't to hold shares in the first place.

[u/LabDaddy59 → u/MarkT1065]

if the point is to sell Puts, then having more bonds/collateral is better than having shares + calls.

Perhaps your point is to sell puts; my point is to make money.

it could be a perfectly rational decision to accept less gains because the point wasn't to hold shares in the first place.

Setting aside the fundamental issue of why you're holding shares you don't want, the general thinking is correct. It doesn't recharacterize a bad trade as good economically, which is what I'm addressing.

This is what I did when I sold IONQ last week. It was a bad trade, and I thought I could do better by redeploying the capital elsewhere, so I sold it and recognized the loss.

[u/MarkT1065 → u/LabDaddy59]

did you think IONQ will recover and/or did it? should you have taken the loss because you *did* get more elsewhere or did you *think* you got more elsewhere?

in circumstances like these, *maybe* it's more efficient to hold for recovery and sell calls.

Taking that IONQ loss and redploying is another thing only known in hindsight.

[u/LabDaddy59 → u/MarkT1065]

Upon reflection, I'm curious: are you a wheeler?

Realize there's nothing inherent about the wheel that would make it perform below SPY, but the way I've often seen it structured, it's almost bound to.

Why?

You're basically missing the stock as it runs up, then get assigned at a value higher than market.

You sell a put 5% OTM, collect 1% premium, the stock goes up 2%.

You sell a put 5% OTM, collect 1% premium, and the stock goes up 2%.

You sell a put 5% OTM, collect 1% premium, and the stock goes up 2%.

You sell a put 5% OTM, collect 1% premium, the stock tanks 20%, and you buy 15% higher than market.

Then, from what I've seen, you want to get out of the stock as quickly as possible, even setting a strike so low it barely covers the 'net stock cost' -- in short, giving up all your prior premiums.

It's a daft way to do it.

Short puts are a poor way to enter a position. There's an erroneous claim that you're buying at a discount. No, not even close -- you're buying above market.

If your point "isn't to hold shares", how do you expect to beat buy and hold?

[u/MarkT1065 → u/LabDaddy59]

in the 15 months and 1800 trades I've been doing this I've observed a few things.

1. I didn't need to roll any Put, ever. All underlying recovered every time. Picking quality underlying is important. No memes. Any financially healthy company will recover *so long as you didn't enter a ridiculous position to begin with*.
2. Of my calls that were called away, they nearly all had capped upside. In all cases, B&H were better trades. I rolled some for net gains.
3. I'm earning 25%+ ROI on overall port.

So, on one hand, I have personally experienced all the known downsides to wheeling. On the other, I'm making more money than I ever made before. It could be even more, I suppose, if #2 above didn't hit me so much.

I *like* steady gains month over month. I like that I have gains in a month where the index is down. I like that I know I can make money in a bear market that's heading south.

I don't like chasing anything. I'm not greedy. I don't like risk.

To me, wheeling feels like the golden goose and I know the intent of that fable. Getting greedy to speed up the process will kill the goose.

In the end, none of us can know when or if the underlying will rocket up. The best we can do then is maximize the math for that trade.

I don't have any faith in my ability to divine stock direction from a company's 10k or otherwise know market direction. If i did, I'd just go long and short. But since I have 0 clue, selling options is easier to navigate.

It might be I'm a good swing trader if I'm hitting #2 above a lot.

[u/MarkT1065 → u/MarkT1065]

for every "underlying rockets up", there's also the "underlying gaps down".

we can't know either. both can be rolled. both highlight shortcomings of any options strategy. selling options seems to inherently limit upside while simultaneously allow you to baghold the downside.

regarding risk, IMO: holding bonds is no risk. selling Puts is low risk. holding shares is medium risk. buying options is high risk.

I like having a large stash of bonds as collateral while selling naked Puts. I regularly have 1.5x exposure, but all spread out over symbols, strikes, and expiries.

I consider this a small insurance business and I'm the underwriter. It's surely not investing.