This is Why You are NOT Making Money Selling Covered Calls

Selling covered calls is a simple and ¨not so simple"option trading concept which 

option traders often begin with. It attracts people because of the appearance of juicy option premiums and yet often befuddles those who mistakenly believe it is an effortless way to gather ¨free" money.

So, I have compiled a simple list of reasons which causes failure for those who 

try to earn regular income from the practice of selling covered calls.

1.  Taking profits before your position is closed. Option premiums may be hundreds of dollars falling into your account with the click of a few buttons. Resist the temptation to ¨count your chickens before they hatch¨ by waiting until your covered call position is closed or assigned before you consider the profit or loss to be realized. The Market is constantly changing. While this volatility is the best friend of an option trader, we must ALWAYS use patience and wait until positions are closed before we consider the gain/loss as REAL.
2.  Selling covered calls on an underlying asset that is about to go through a reverse split. Don´t sell covered calls on underlying equities that you do not fully understand. A surprise, merger, a negative earnings report, or a shocking news report can cause an unexpected loss in your covered call position. Do your due diligence and research the companies before you bet your hard earning money on a covered call position.
3.  Not choosing the most profitable strike price at which to sell the covered call at. Choosing strike prices is an art in my humble opinion. There are those who calculate complicated formulas to determine which strike price at which to sell a covered call at. However, I prefer the tried and true method of relying on many years of market experience.....reading tape...as they say.
4.  Choosing low quality underlying equities upon which to sell covered calls. Although, people can and do, sell covered calls on lower quality stock, it is inherently more risky to do so. Risk can lure in option traders with juicy high option premiums. But it can be very painful to your wallet to pour good quality money into a low quality equity position just for a very temporary boost in option premium. KNOW your underlying assets....and choose wisely.
5. Using margin debt to finance the selling of covered calls. The stock market can be volatile, and using debt to finance your covered call option trades can be tempting, and can sometimes be profitable. However, any usage of leverage (debt) must be done wisely and with the understanding of risk, reward and interest rates. Not all investors have the temperament to manage debt wisely. Those who have a ¨gambler´s mindset may not want to even entertain the idea of using debt to ¨play¨ options with.  Debt is a great tool in the hand of a master, but a deadly weapon in the hand of a fool.

Well, friends, that´s enough caution and warning for a beautiful Sunday afternoon. Be blessed in your investing and trading.

Peace,

Carla

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High Risk Covered Calls or Low Risk Covered Call Options

Are you an option trader ? Do you sell covered calls?

Today I just wanted to discuss how you can influence your levels of risk by several key factors when and if you sell covered calls.

For brevity, I am going to assume that you all know how to ¨sell to open¨ covered calls. If you do not know what  a covered call option is.....then this post may not be helpful.

What raises risk in a covered call scenario?

permit me to draft a list:

• Selling covered call options way out into the future...such as 6 months or even 2 years into the future. The future is unknown and the more we try to predict long term results....the more risk we may encounter....due to unexpected market movements.
• Using leverage to finance the purchase of the underlying asset. Using margin debt to finance your purchases of the underlying asset adds more risk to your portfolio. Not only must you prepare for interest payments on the money you borrow in your margin account, but you must prepare to prevent a margin call on your account, when/if your buying power becomes challenged by negative market forces or poor investing choices.
• Selling covered calls on equities that have an unproven financial record can/may add more risk to your accounts. When investors choose to sell covered calls on publicly traded companies that have no positive financial reports, they add unintended risk to their holdings.

There are several ways to minimize risk when selling covered calls on your stock portfolio. 

Permit me to draft another list:

• Sell covered calls on stock that you have paid for in full....(without leverage)
• Sell covered calls on companies with proven sound financial management, that produce healthy price to earning ratios(p/e ratio) and have a good reputation. Have a healthy respect for positive earnings. What is trendy is not always a ¨good bet¨.
• When you want to withdraw money from the premiums you have collected by selling covered calls, only do so after the contract has expired or been closed or assigned. This simple tactic will prevent unnecessary stress if/when a covered call position runs in a direction that you did not expect.
• Last but not least...do not lower the strike below your cost. This is very important, so that you do not risk losing money on the difference between your net cost of stock and the potential inflow of cash if/when a covered call that you have sold gets ¨assigned¨. To be fair, it is important to note, that there may not always be a strike price available at the correct price point to make your trade profitable. Therefore you may have to just ẅait and hold onto stock that needs time to recover from a market dip. This is another reason why it is prudent to eliminate the use of debt/margin/leverage when purchasing equities....so that you will be able to weather market ups and downs..... while maintaining a stress free and dignified investing experience.

Well.... that is all friends, for today. If you are an option trader or investor, I am sure you have discovered a plethora of methods you can use to control and/or define your risk. There is nothing more important in investing than controlling risk.

May God bless your trading and investing as well as your learning journey.

Peace,

Carla.

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