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Wealth Building with Options
Dan Passarelli | Substack
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Options involve risk and are not suitable for all investors. Before trading options, please read Characteristics and Risks of Standardized Options (ODD) which can be obtained from your broker; by emailing investorservices@theocc.com; or from The Options Clearing Corporation, 125 S. Franklin St., Suite 1200, Chicago, IL 60606. The content on this site is intended to be educational and/or informative in nature. No statement on this site is intended to be a recommendation or solicitation to buy or sell any security or to provide trading or investment advice. Traders and investors considering options should consult a professional tax advisor as to how taxes may affect the outcome of contemplated options transactions.
Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
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2 Responses
Hey,
I’ve noticed there are a few websites boasting the attributes of selling covered calls.
My understanding is that a person has a portfolio of shares and then sells a covered call to gain income from the portfolio in addition to dividends.
If the price stays below the strike that’s okay. But if the price moves significantly and rapidly beyond the strike then the trader will have to sell the shares for less than their real worth (when the option is exercised). In these circumstances the covered call strategy is detrimental. The shortfall in price may be larger than the premium received.
Surely the correct strategy would be to sell puts. That way the portfolio risk is protected, and the trader lets the profits run.
Hey Geraldine, There are a lot of things to consider. Overall, data show that covered calls (and cash-secured puts) outperform the buy and hold in the long run. But, yes. You are correct that if the stock rises through the strike and you do nothing and lose the stock, you don’t get the dividends or participate in further price appreciation. Our methodology takes into account 1st the trader’s objective (does the trader want to keep the stock or are they using it as a way to intentionally exit it?). Secondly, we have adjustment strategies that when used properly can usually help avoid that unwanted assignment.
We have a starter video that introduces our system here https://training.markettaker.com/s/ANhOiM and at the end, give you a chance to move forward with using the complete system. Take a look and see how it works.