Beginner question here: I'm selling a covered call that's currently at a loss but the expiration date is not until later so I'm debating to hold on to it as it may have a good chance to bounce back (it's on TSLA, so the ups and downs can be drastic). What are some ways to mitigate the loss on this covered call? Would it ever make sense to sell a covered put to mitigate the risk? If not, what are other possibilities? I know exiting the covered call position is one, any other potential ideas? Thank you.
Sell put to cover the loss from a covered call?
- Thread starter ETraderJoe
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If you are expecting any serious replies, please provide details. What yo have described is very generic. With TSLA making a moonshot today, how can you be at a loss if you sold a covered call? That is long 100x shares with short x calls? You must be making money today on the position. Or is your position something else? Or did you do this at the top and now the stock is down from there? So many questions lol
You probably sold a naked call rather than covered call? If a covered call, you should have a profit if combining long stock + short call.
Disclose call sold and at what price you sold it. Plenty of options experts here (I'm not one of them) to give suggestions but your information is too vague to give any meaningful suggestions.
Disclose call sold and at what price you sold it. Plenty of options experts here (I'm not one of them) to give suggestions but your information is too vague to give any meaningful suggestions.
Here is the thing for us newbies who sell covered call to "generate income":
We watched tastytrade, read Wall Street Money Machine and said to ourselves, we finally found free lunches from Wall Street! If we sold OTM or DOTM calls, we would seldom be called away, and even if we did, we made money on the underlying how nice we always win! We owned GOOG, TSLA... for years and we could sell covered calls against those to get a free income stream! The truth is we never had any intention of selling those stocks, we just wanted to use them to generate income.
Then, the unthinkable happened, the calls were underwater. What could we do? Ahh, we could roll up and out, paid a little and "escaped". Unfortunately TSLA went way up again... Finally the stocks got called away, we sucked it up and bought them back at a much higher price (or some paid through the nose and closed the calls so they didn't have to sell the underlying). We effectively had a net loss in this scenario. To add insult to injury, now we had to pay tax on the stock gains because those were our long term holdings.
What I described was what happened to this newbie back in 2013. That is why now I only sell covered calls or CSP on special occasions and do it with great care.
What I think ETraderJoe is saying, is that he bought stock in Tesla and sold an upside call against it. But as it turns out, if he would’ve only bought the stock, and not sold the call, he would’ve made way more money. By selling the call against the stock in essence he capped his maximum return.
Typically, when new traders do this, they kick themselves or second-guess themselves for selling the call against the stock to begin with, but you should not do this. The fact is, with a covered call, if the stock trades above your short-called strike price the stock is going to be called away from you, but you are hitting your maximum profit potential from when you entered the trade.
It is true you’re not going to make as much money as if you never sold the call, but you still made money and probably quite a lot of it. Be happy you won the trade, your analysis was correct, keep the profits and let the stock it call the way, then look for the next trade.
A covered call is synthetically equal to selling a short put.
If you sell a cash secured short put after establishing a covered call then you are averaging up or down, depending on the value of each position's the strike price less the premium received.
Where this gets a bit convoluted is if the synthetic put (the covered call) has a locked in loss. In that case, it's a bit more complicated and I'll leave that be since there was some question by others as to what your actual position is.
The short answer is that adding a short put to a covered call is just averaging and it doubles your risk exposure (o the downside).
If you sell a cash secured short put after establishing a covered call then you are averaging up or down, depending on the value of each position's the strike price less the premium received.
Where this gets a bit convoluted is if the synthetic put (the covered call) has a locked in loss. In that case, it's a bit more complicated and I'll leave that be since there was some question by others as to what your actual position is.
The short answer is that adding a short put to a covered call is just averaging and it doubles your risk exposure (o the downside).