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Tuesday, July 31, 2012

Covered Calls

There's a huge push by a certain group of "advisers" for covered call writing. It is always presented, at least it feels this way to me, as a source of free money. These picks, for instance, seem rather poor choices to me.

I haven't gotten around to doing my own in-depth analysis of covered call writing, but I read this one earlier today.  I love this quote:
"As shown, they also partially hedge in downtrends. But the best use of covered calls is if you can see into the future and pick when your stock is going to go sideways."
They are great if you know the stock isn't going to go up too much. It's because writing covered calls limits your upside. It doesn't magically make money appear out of thin air. Plus, if you're not already long the underlier, you're taking on significant downside risk. The stock can still go to zero, and you would be taking that loss. While the stock can go to infinity as well, you're limited by whatever your upside call was sold at.

The strategy is not a magic money maker. It is, if anything, a portfolio volatility reducer.

1 comment:

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