Like many beginners, when I started trading options, I sold covered calls, then cash secured puts. Then buying calls and puts. I remember in those days, I often said to myself, “covered call writing is such a wonderful strategy because at the end of every month the calls expire worthless and I’d sell another call and collect the premium. I can do this month after month!”
But after using this strategy for a while, I have to say that this is not as “safe” of a strategy as some people believe. Yes, you sell your call; keep your premium no matter what happens to the stock. But the fact is you can lose a lot from your declining stock–much more than the premium can ever give you. Yes, in a declining stock you can keep selling lower and lower strike calls, but the loss from the stock would still be greater than the premium collected, or break-even at best. For example,
–bought SPY at 120 and sold the 119 call
–at expiration SPY closed at 114. Premium kept, long stock.
–sold the 112 call trying to collect higher premium in a declining stock
–at expiration SPY closed at 108. Premium kept, long stock.
–sold the 106 call trying to collect higher premium in a declining stock
–suddenly SPY went up and at expiration closed at 115
–assigned at 106
Overall, SPY was bought at 120 and assigned at 106, a loss of $14. Yes, I collected premium along the way, all ITM calls:
— sold 119 call when stock at 120 then,
–sold 112 call when stock at 114 then,
–sold 106 call when stock at 108.
Sorry, I couldn’t find the exact amount of the premium collected. But, I do not think it’s more than the $14 loss from the declining stock. Perhaps at best, it was a break-even. That is, I collected $14 in premium but then lost all of it from assignment at the end. (This message is not: assignment is bad.)
Well, even if it was a break-even, it still wasn’t a good experience: I put in all the time, effort and anticipation that I am using a very “safe” & “good” strategy, but at the end, it was just a break-even or a loss.
So, I just wanted to share with you about the experience that CCW is not without risk, especially when the stock plummets and suddenly shoots up. And the fact is, it is not uncommon nowadays to see a volatile market, so stock prices behaving in an unpredictable & erratic manner is not at all unusual.