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Tried this last night and got no responses, so I figure I'll try again (now that it's no longer Sunday.)
Ok guys, please tell me the downsides of covered calls. I've never done options trading and want to try to leverage my existing portfolio. From what I can tell, it works like this:
>Offer 100 shares of stock for price plus premium
>Premium is paid immediately, and is yours to keep regardless if the option is exercised
>If price rises above option price, may have to sell below actual market price
>If prices fall below option price, buyer probably won't execute because they'll be paying more than market price
It looks like a pretty safe way to do an option. I have to be missing something here.
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>>1324926
>Shameless self bump, page 3 is not where it is to be
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>>1324926
Wrong. Covered calls require two things:
1. Own 100 shares of stock XYZ.
2. Sell a contract (option) to sell 100 shares of XYZ at $S/share for a premium.
All options have 3 outcomes: price goes up, price stays even, price goes down.
Price goes up: Your shares of XYZ are more valuable, but you're contractually required to sell them at $S (strike price). You miss out on any gains (theoretically this could be a lot). Your profit is capped at the premium.
Price stays even: You keep your shares of XYZ which are neither worth more nor less. You keep the premium. Your profit is the premium.
Price drops: You keep the premium, but your shares in XYZ are now worth less. Your loss is slightly offset by the premium.
Like most options, only one scenario is truly good for you. The ideal situation for covered calls is flat market; your portfolio value stays even, but you earn the premium. The premium softens the blow in the other two scenarios, but they're still bad for you.
So, like most options, you have to guess the future correctly to truly make it pay, assuming your goal is to grow your wealth. That's why options are a bad choice for most investors, because most investors want to make money and the odds are stacked against you in every option scenario,
As proof, see pic related. This is a graph of the S&P 500 covered call index vs. the S&P 500 for 10 years. As you can see, just owning stocks outright yielded noticeably better performance. Covered calls helped a little during the 2008 crash, but in the long run you were better off just buying and holding the stocks and forgetting the options nonsense.
The ONLY time covered calls make sense is when you need to flatten out your volatility by smoothing out the upside and downside cases. Very few people need this level of control over their risk, or are so risk adverse that covered calls make sense.
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>>1325004
>2016
>using pages instead of the catalog
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