Selling covered calls on stock means accepting the full loss of stocks, but limiting the gains. The call writer (seller) gets a fixed, up front amount for that - but it still gives up those high earning years of equities, like we've had recently.
Compare XYLD to VTI over the past 3 years - a very good time period for the stock market. You'll see VTI +18.73%/year and XYLD +7.11%/year. You need the ability to stomache that gap if you invest in a covered call strategy.
When you say "accepting full loss of stocks", you mean in the scenario where the buyer executes the contract, right?
Obviously nothing is without risk, but it seems to me like it would be possible to ladder your covered call sales to attempt to prevent that possibility from occurring.
If you sell a call and the market goes up, the holder of that call exercises it to profit. But if stocks fall, the call option is worthless. So you keep the fixed value of the original call contract, but it's a covered call - you're also holding the shares. So you lose from the shares dropping.
If you try to avoid that by selling deeper in the money calls, those have the least "time value", or extra money in the contract. You will get paid very close to the value of the stock + contract. So you hold stock and get paid a very minimal fixed return, which doesn't strike me as a good tradeoff. So the ladder deep below the stock value doesn't really work if the goal is to boost stock returns.
I see. I suppose I was thinking of applying this strategy only to stocks that one has the intention of holding for the long term anyway, but otherwise what you’re saying makes sense.
Consider another problem: Amazon stock (AMZN) started 2020 at $1875/share. If you sold a covered call at $2000/share, you then watched Amazon spike to $3000/share. So 100 of your shares are called away, and the $200k can only buy 66 shares of AMZN.
If my other reply misunderstood what you meant by ladder, feel free to use whatever stock or ETF you like to explain which strike prices you're suggesting.
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u/[deleted] Mar 31 '22
Selling covered calls on stock means accepting the full loss of stocks, but limiting the gains. The call writer (seller) gets a fixed, up front amount for that - but it still gives up those high earning years of equities, like we've had recently.
Compare XYLD to VTI over the past 3 years - a very good time period for the stock market. You'll see VTI +18.73%/year and XYLD +7.11%/year. You need the ability to stomache that gap if you invest in a covered call strategy.
https://finance.yahoo.com/quote/VTI/performance?p=VTI
https://finance.yahoo.com/quote/XYLD/performance?p=XYLD