CC10: Before you sell a covered call

Before you sell a covered call make sure you understand the risks involved and how to mitigate them.

While selling covered calls is the least risky option trade nothing in the market is risk free. One Fool already alluded to it by saying that you are better off just holding the stock. True in some but not all cases.

  1. What if the stock goes down? That risk exists any time you buy a stock but by selling covered calls you actually reduce the risk by the premium collected. The one difficulty is that you cannot sell the stock before buying back the call or letting it expire. Not a major issue.

  2. Opportunity loss is a real risk specially with growth stocks. If the stock rises beyond the strike price the premium might not compensate the opportunity loss. With slow growth value stocks this is not a major issue but nonetheless it could create tax liabilities. The solution I found was to compartmentalize the portfolio into three sections.

a. Reserve cash which is best kept in a separate account and used to cover emergencies and bear market expenses.

b. Long term hold, stocks that are not used for income except in special situations. About 75% of my portfolio, YMMV.

c. Income from covered calls where the primary objective is to generate cash. About 25% of my portfolio, YMMV.

The Captain


And since the stock market in general goes up, the strategy has a definite headwind.

It is the major risk with selling covered calls. The strategy will underperform just buying stocks unless you think that the options are mispriced.


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You need to explain it to me because I just don’t see it. What I see is that if the stock goes down you lose less because you have collected the option’s premium.

The Captain

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Please help me understand this.

Selling covered calls is not a winning technique if the market goes up faster than the compensation for selling the call.

The best time to use covered calls if the market opinion is that the market will go up but the call seller believes the market opinion is wrong. And if the call seller wants to hold the stock for the long term (i.e. for dividends).


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Correct in principle but each option is stock specific. One needs to pay attention to the stock one is trading which is why I separated low growth value stocks from high growth growth stocks. This is the reason for not selling covered calls on growth stocks. Covered calls work best on flatliners!

The best time to use covered calls if the market opinion is that the market will go up but the call seller believes the market opinion is wrong.

Much too convoluted reasoning for me! :wink:

And if the call seller wants to hold the stock for the long term (i.e. for dividends).

Absolutely, don’t sell covered calls on stocks you want to hold. Dividend payers are highly likely to be assigned when the dividend is due.

The Captain


That is true. However, over time the direction of the stock market is up (some 10% per year). It is this upward trend that works against a strategy of selling your potential gains (selling calls).


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You let your winners run. If they are called away you are making a mistake. That is the headwind over time.

As far as growth stocks, it depends on what stock issue you are discussing. For example people have made a fortune in TSLA…but there are strong odds the stock wont fully recover to its glory this next go round. Now I could be very wrong because Musk opens up massive markets, but the EV he is selling is a small part of market share over all including ICE. The EV competition is just beginning to heat up. All in all Tesla is a growth stock but the value of it has hit an all time high much earlier in 2021 - 22.

XOM has seen terrific things the risk now is much more to the down side. People are under appreciating the development of alternative energy. If you had sold covered calls of XOM in mid 2021 you’d be out. If you do not get out of XOM at this point YOU MIGHT BE out…but infusing options into the thought process over complicates any decisions.

XOM is one of the BIGGEST investors into alternative energy! It is entirely possible that they become a big player in that new industry.

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That’s because of all those generous investors out there that are willing to give you all that money for “free”. I’ve almost always found that assuming the person opposite you on a trade is irrational (“giving away free money” is irrational) means that you haven’t properly analyzed the situation.

Now that doesn’t mean that sometimes the person on the other side of the trade isn’t irrational … sometimes they indeed are. But to rely on it on a regular basis becomes dangerous over time.

When I was installing solar panels on my boat, late 1990s, the two leading brands were Siemens and British Petroleum. Oil companies are in the energy business!

The Captain



I guess the full article is behind a paywall but for now no mention of alternative energy.

As a friend, I do not want to you figuratively mugged in the parking lot because you read Barrons. Talk about a publication that likes to use its readers. Waiting into October to pump XOM? Why so late in the game? Oh I get it they pumped months ago. Probably said “extremely dangerous to play oil now” in April 2020.

Back in 2018 Barron’s was bullish on XOM.

"XOM may be enjoying a bigger boost than the rest because of a favorable Barron’s article over the weekend, calling the company “a bet on the future of oil.”

From 2019:

“Barron’s also touted the Vanguard High Dividend Yield ETF (VYM), which holds high-yielding blue chips like Johnson & Johnson (JNJ), Exxon Mobil (XOM), and JPMorgan Chase (JPM), and recently hit a 3.5% yield.”

And in January of this year they expected XOM to beat estimates.



That is all good but the point is where was the Barrons in March, April and May 2020?

Remember buy low sell high? Dont bother much with the Barrons then.

I don’t know, and since I don’t have a subscription it is all behind a paywall. Do you have any links to that period?


Just after we discussed it here at METAR a few months ago, I [unfortunately] sold all my XOM on 3/1/22 immediately after oil cracked $100. I sold it for $79.51 … now it is trading at $111.96. I count that as a “mistake”, not as a “good decision”. I still hold some XLE and CVX.

Don’t know if they recommended Exxon, but from May 2020:


You made a larger profit. That is never a mistake.

Now oil is dropping again.

There are those saying oil to the moon. Good luck if those nutjobs make sense to you.

The USD has softened for now. Does not matter what the USD trades at all major currencies will appreciate against commodities over the long haul.

The problem with reading the Barrons everything is mentioned with quotes etc…but understanding why oil would fall over the next three years…crickets…meaning when you go long following the Barrons and it goes up fantastic. Nothing to do with the Barrons. When it goes down after reading the Barrons…oh well. Still nothing to do with the Barrons.

So you are long CVX? Is oil going to go up from here? If you say yes no reason to care what anyone says. If you say no you have your answer.

Meaning while you have my opinions. No need to care just read them and move on. You are not paying for them.

But Barrons is worthless. Just dumb luck good or bad no matter what happens.

Read an upper level text book on public finance to understand the FED, monetary policy and fiscal policy. They are very much in play and oil is responding to them. Slowly over time…which is what any of us are holding…something over time…