Does selling covered calls make sense?

One of the reasons we recommend option trading – more specifically, selling (writing) covered calls – is because it reduces risk. It’s possible to profit whether stocks are going up, down or sideways, and you have the flexibility to cut losses, protect your capital and control your stock without a huge cash investment.

Do covered calls increase returns?

The writer of the call earns in the options premium, enhancing return, and is a common strategy for investors in their retirement accounts. In an IRA, the taxes on profits generated from covered call writing can be deferred or exempt.

What is a good premium for a covered call?

What makes a good Covered Call? We’ll answer the second question first. A good Covered Call is most often a call with a high premium (a premium that is 10\% of the value of the stock or better when not on margin and not “In-the-Money”). High premiums are usually generated by positive volatility in the stock.

What is the downside to selling covered calls?

Cons of Selling Covered Calls for Income The seller’s profit is limited to the premium received plus the difference between the stocks purchase price and the options strike price. A significant drop in the price of the stock (greater than the premium) will result in a loss on the entire transaction.

Can you make a living selling covered calls?

In general, you can earn anywhere between 1 and 5\% (or more) selling covered calls. How much you earn depends on how volatile the stock market currently is, the strike price, and the expiration date. In general, the more volatile the markets are, the higher the monthly income you’ll earn from selling covered calls.

How can you lose money in covered calls?

The maximum loss on a covered call strategy is limited to the price paid for the asset, minus the option premium received. The maximum profit on a covered call strategy is limited to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received.

Can I sell my shares if I sold a covered call?

As long as the covered call is open, the covered call writer is obligated to sell the stock at the strike price. Although the premium provides some profit potential above the strike price, that profit potential is limited.