why do people recommend covered calls.

[TheGoonior]

Quote from noob_trad3r:

Well really why buy the stock and then write calls, two transactions

when just selling the puts and having the cash put away only uses 1 transaction and is really the same thing as a covered call.

There are differences:

1) With a put you get no dividends.
2) Covered calls are the most basic option strategy there is and one of the few you can get on a 401k. Cash secured puts is a step up from that and often a broker will not approve it for you.

I trade several stocks that have monthly dividends and also write covered calls against those shares for a bit more income/downside protection. I'm not looking for 500% returns, just a bit of a boost on some steady gains.

 

[xflat2186]

The dividends are priced into the puts and calls so you're not collecting anything additional or losing the dividend.

 

[scriabinop23]

Most of the time, call writing on stock positions (esp in low volatility environments) is an absurd proposition. It makes holding stock a -lot- riskier in the long run. (Why? Because when a stock finally runs in your favor, you don't get paid for the downside risk you are taking. Winners need to pay for losers in a portfolio. If you cap your winners, you have nothing but large losses and small wins.) In other words, call writing is just another way to generate commissions for brokers. Put another way, it is also the only option writing strategy 'for dummies.' Risk is capped, but so are returns.

If I hold stock, I want to get paid for taking the risk.

To answer the original question: It is recommended by people who think it makes them look sophisticated (and appealing to clients) and/or people who own brokerages. It generally works as a marketing method for clients who don't know any better.

 

[KINGOFSHORTS]

Quote from scriabinop23:

Most of the time, call writing on stock positions (esp in low volatility environments) is an absurd proposition. It makes holding stock a -lot- riskier in the long run. (Why? Because when a stock finally runs in your favor, you don't get paid for the downside risk you are taking. Winners need to pay for losers in a portfolio. If you cap your winners, you have nothing but large losses and small wins.) In other words, call writing is just another way to generate commissions for brokers. Put another way, it is also the only option writing strategy 'for dummies.' Risk is capped, but so are returns.

If I hold stock, I want to get paid for taking the risk.

To answer the original question: It is recommended by people who think it makes them look sophisticated (and appealing to clients) and/or people who own brokerages. It generally works as a marketing method for clients who don't know any better.

Curious so if you long a stock does it just sit there for days and days while it reaches a specific price that you are willing to sell the stock?

If you are not a day trader and you own 10 lots of SPY why not collect some cash while you wait for the equity position to reach a level you consider overpriced and a good sell. Same with short put positions, if you feel todays price is high, pick a price you consider a fair value and get compensated while you wait for the price to reach a level you feel comfortable owning the equity at.

Unless you are perfect at buying at the low price and time the highs perfectly. If you can time the perfect price points then selling short options make no sense. You can make millions just putting up huge buy and sell orders and being correct 100% of the time.

 

[nazzdack]

Quote from noob_trad3r:
-----sell cash secured puts.....
-----margin.....for covered calls.

From a litigation perspective, covered-call writing is "less risky" than cash-secured, put-selling in the eyes of your brokerage firm.....just in case your underlying stock goes to zero during the trade.

 

[spindr0]

Quote from KINGOFSHORTS:

If you are not a day trader and you own 10 lots of SPY why not collect some cash while you wait for the equity position to reach a level you consider overpriced and a good sell. Same with short put positions, if you feel todays price is high, pick a price you consider a fair value and get compensated while you wait for the price to reach a level you feel comfortable owning the equity at.

Well, yes and no. Calls appreciate as the underlying rises so prior to expiration, they slow the rate of gain (net delta of CC is < 1 )

 

[spindr0]

Quote from nazzdack:

From a litigation perspective, covered-call writing is "less risky" than cash-secured, put-selling in the eyes of your brokerage firm.....just in case your underlying stock goes to zero during the trade.

In a convoluted way, CC's are safer than NP's because margin on stock is 50% so CC's margin is a little less due to premium received. Margin on NP is approzimately 20% so you can blow yourself up 2-1/2 times as fast with NP's


:eek:

 

[KINGOFSHORTS]

Quote from nazzdack:

From a litigation perspective, covered-call writing is "less risky" than cash-secured, put-selling in the eyes of your brokerage firm.....just in case your underlying stock goes to zero during the trade.

lol its the dumbest argument. I mean the guy who wrote covered calls on BSC got screwed just like the guy short puts BSC

 

[xflat2186]

Quote from nazzdack:

From a litigation perspective, covered-call writing is "less risky" than cash-secured, put-selling in the eyes of your brokerage firm.....just in case your underlying stock goes to zero during the trade.

What would "litigation" have to do with anything?

This is getting funnier by the moment.

Litigation

 

[nazzdack]

Quote from spindr0:
In a convoluted way.........

Margin treatment aside, put-writing is more likely to be deemed "unsuitable" for a client than covered-call writing. (The Law & Order "bells" ring in the background).