Worst Case Scenario in Covered Call trading

[Quanto]

When trading a Covered Call (ie. LongStock + ShortCall) then the risk is known in advance as it's
"Risk = InitialStockPrice - InitialCallPremium" that one can lose maximally.
It's also the net invested value, ie. the net debit.
And also the term "covered" indicates this fact.

I just wonder whether this holds always, even if the company goes bankrupt or so?
Are there any situations thinkable where one could lose more than the above pre-computed risk?

The rationale for this question is this:
if there is not any additional hidden risk involved then one can invest more, and the risk would stay relatively the same, on a percentual base. By this, one could concentrate just on this one ticker only instead of looking for multiple tickers for diversification (which takes much time & work, btw).

What's the absolute worst case scenario imaginable for such Covered Call trading?

 

[Robert Morse]

I like to keep this simple. The "worst case scenario" for a Covered Call is the stock going to $0.00. Call premiums do not offset most downward slides in stocks. I have posted this before. I'm not a fan of Buy-Writes in general of single stock names. You take the time and effort to pick a winner, (A symbol you expect will outperform the market and other stocks), but you cap your gains by selling a call that does not really protect your downside. It only offers a small offset toward losses if you are wrong.

What's the absolute worst case scenario imaginable for such Covered Call trading?

 

[Quanto]

I like to keep this simple. The "worst case scenario" for a Covered Call is the stock going to $0.00. Call premiums do not offset most downward slides in stocks. I have posted this before. I'm not a fan of Buy-Writes in general of single stock names. You take the time and effort to pick a winner, (A symbol you expect will outperform the market and other stocks), but you cap your gains by selling a call that does not really protect your downside. It only offers a small offset toward losses if you are wrong.

Thanks, but adding some cheap LongPuts to the CC turns the whole into a very interessting construct, IMO.
Ie. by turning the CC into a "Collar" and more.

I just wonder if one can replicate (continue) the trade when an early exercise by the counterparty happens, as this closes the CC early. I think this is the worst-case scenario.

 

[2rosy]

You do a covered call and the underlying company gets bought out for 100000...X.

 

[destriero]

Thanks, but adding some cheap LongPuts to the CC turns the whole into a very interessting construct, IMO.
Ie. by turning the CC into a "Collar" and more.

I just wonder if one can replicate (continue) the trade when an early exercise by the counterparty happens, as this closes the CC early. I think this is the worst-case scenario.

CC = synthetic short put
Synthetic short put + put = synthetic bull vertical

There is nothing interesting about it. It's a bull spread. If you're worried about assignment they you're already fcked.

 

[newwurldmn]

CC = synthetic short put
Synthetic short put + put = synthetic bull vertical

There is nothing interesting about it. It's a bull spread. If you're worried about assignment they you're already fcked.

some men, you just can’t reach. So you have what we had here today.

 

[Cabin111]

Be sure it is a ETF and not a limited partnership (example USO)!!

If you see something like this, you could lose more than the stock...

https://www.fidelity.com/bin-public...ments/accounts-trade/MLP_trade_disclosure.pdf

 

[BKR88]

adding some cheap LongPuts to the CC turns the whole into a very interessting construct,

A call spread will have the same R:R and lower margins than buying the equity, put & selling the call.

Example:
Buy 100 shares @ 30, buy 25P & sell 35C is the same as buying the 25/35 call spread.

 

[Quanto]

An exemplary PnL diagram of an "Extended Collar" (CC + xLP): S=10, SC.K=7.5, LP.K=5, DTE=45
Watch the R:R

 

[destriero]

An exemplary PnL diagram of an "Extended Collar" (CC + xLP): S=10, SC.K=7.5, LP.K=5, DTE=45
Watch the R:R
View attachment 328284

fcking LOL.