If you use a growth stock (one that will go up quickly), and write a covered call, you run into this situation:
BUY XYZ @ 100
Covered Call @ 120
XYZ hits 150
You sell at 120
Profit: 120 - 100 + premium = 20$ + Premium
If you had not written the covered call your profit would be:
150 - 100 = 50$
The premium you will get from writing the covered call is unlikely to be 30$ to make you break even. It will be very difficult to choose a stock with a premium that will reach a certain strike in a certain period of time that will yield you better results than simply buying & holding. And if you could do this, one might ask why not just buy CALL options instead.
If you use a slow stock, spikes/volatility is less likely, so you're situation will be more like:
BUY XYZ @ 100
Covered Call @ 120
XYZ Hits 110: Collect Premium
XYZ Hits 125: Collect 120-100 + premium : 20 + Premium
In this situation, you are less likely to miss out on a big spike in stock price. You will however, get a much smaller premium for your trade. Option premiums are based on the likelihood of a spike occurring (volatility).
In my humble opinion:
Writing covered call options is a valid strategy to collect a little extra 'premium' on a stock that you would otherwise be holding (because you believe it is a good investment). And you are pricing the potential sale at a price you would be willing to sell at, anyways. I.e.:
BUY XYZ @ 100
You think: If this goes up 20$ in the next 3 months, I will sell it as soon as it hits 120$
Write Covered Call @ 120
XYZ hits 120: (Normally you would sell, but you do not, you let the option exercise potentially)
XYZ hits 150: Option exercises, you sell at 120 (which you were going to do anyways), and keep the premium.
If, however, your plan is to hold indefinitely (long term investor), you run the risk of selling too soon (120/150) when you really wish to hold it for years. And you may end up thinking of buying it back at 150 because you wish to keep it in your portfolio. In this situation, it could have dire consequences:
BUY XYZ @ 100
SELL @ 120
BUY @ 150
SELL @ 170
BUY @ 200
Your profit would be: 120-100 + 170-150 = 20+20 = 40
Instead of:
200-100 = 100
In other words:
Closing out positions prematurely due to covered calls being exercised will result in you loosing out the big gains, and holding during potential drops.
(Imagine buying TSLA @ 200$ before the split, writing a covered call option for 300$ and then seeing it's value now).
This can occur with both volatile stocks, and non-volatile stocks. The only difference between the two is the value of the premium from the option, and the possibility of a large movement (and therefore, missing out on a big gain).
One big caveat about the growth stocks: IF you buy and hold for purpose of writing options, it could drop a lot.
That being said, GE isn't doing too well lately is it?
