[unabridged]

The strategy they are describing (selling covered calls) is actually less risky than holding the underlying. They make more than just holding the underlying when it drops or stays flat, and in exchange they make less when the underlying goes up a lot.

Options are just a tool that lets you dial in the amount of risk you want, they can be set up to be more conservative or more risky than the underlying. The latter is what makes the news.

[chollida1]

> The strategy they are describing (selling covered calls) is actually less risky than holding the underlying.

Not necessarily. If you assume the idea is to make money, say a stock is at$100 a you sell a $110 call for $2

The stock then goes to $200.

You have lost $90 of gains to make $2.

That's a huge loss.

Selling covered calls decreases your downside slightly but earning the option premium but it completely destroys your upside by taking away any of the upside beyond the call's strike.

that's much riskier than just owning the stock outright as your downside is capped but yoru upside is unlimited.

[LanceH]

At least get the numbers right. This would be losing $90 to make $12.

Using Abbot Labs as an example, a $2 option for 10% over current price would expire roughly 4 months out. So you could make $6/year, and only risk losing the gains over 10% that occur within each 4 months.

The types of stock I'll do with this are generally those I view as reliable, possibly with a dividend (yes, increasingly rare these days), with little exposure to catastrophic downside. This chunk of my portfolio is about minimizing the catastrophic as dollars 1-100,000 have a lot more utility in retirement than dollars 1,000,000 -> 1,100,000.

[ivanche]

The problem with this line of thinking is assumption that the OP would hold the stock until it reaches $200. But he wouldn't. He was ready to sell at $110. He is better off selling covered call + shares @$110, then only selling shares @$110. Another problem is the assumption that everybody can sell on the top (in this case, $200), while it's obvious they can't. And since when is profit of $10 per share == a huge loss?

[chollida1]

And the problem with yoru line of thinking is that at the moment you write a call you are stating the time at which you may be selling the stock.

if you didn't write the call you could sell at any time, but you did write the call so you set the time at which you sell.

if the stock goes up alot then you end up losing alot of the upside.

[ivanche]

If you think the stock will go up from $100 to $200, don't sell covered call. Nobody forces you to. But if you have sold it, it means you didn't believe stock would go that much up.

If one sells a covered call but is not ready to sell the stock at that price, that's one's problem, not "covered call is a bad strategy" problem.

[MuffinFlavored]

Isn't the downside to selling covered calls that, not only do you need to hold the underlying, you can get the option you sold exercised, aka you lose your 100 shares per contract?

[jeffreyrogers]

Yes, so the upside is capped but you get to set the cap based on what call you sell. The bet you're making is that the stock won't appreciate enough for the other party to exercise the call option (so you earn the option premium + underlying appreciation). If the option is exercised you lose some of the gains you would otherwise have made, but you still captured some of the appreciation.

But there is no increase in downside in the financial sense (if the stock price declines you keep the premium).

[MuffinFlavored]

but if I hold the underlying long in the first place, I’m bullish in it, and I don’t want my shares to be “called/exercised” away from me, no?

[jeffreyrogers]

Yes, but you might think it will appreciate less than other people do and expect to make money by selling calls on average.

[ankit70]

You can technically do it with buying future of a stock and selling covered calls.