Can you explain why you would buy calls? When I start a new wheel trade, I’ll sometimes buy puts out 4 weeks or so to protect against a big drop in the stock price.
thanks,
Darryl
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The standard wheel is you buy a stock and then sell the upside call and continue that until the stock is called and then write a put, until you get the stock assigned. This requires higher capital for stock purchase and the risk of stock declining suddenly. If you want to buy a put to mitigate the stock decline that is another cost.
Now, much simpler and cleaner is buy few months out slightly in the money call and then sell calls against it. It works the best with stocks that pay no dividend or very little dividend. The call you bought has slower time decay and the call you are selling has higher time decay. Of course the price can fluctuate, so generally you want to select stocks that are trending up or have momentum.
Often many retail option traders, including myself, select stocks based on their view of fundamentals. If you are trading options it is better to use momentum as the criteria to pick stocks. Of course it is not easy, I throw in few momentum, and mostly still use my fundamental view as a filter.
Earlier I used to think, if I bought the stock the price declines I still own the stock, as long as I don’t sell I am not incurring loss. Over the years I have realized that is the worst way of thinking. What you are doing is converting a short-term loss into a bigger long-term loss. If a trade didn’t workout for whatever reason, accept the loss and move on.
This quote opened my eyes
“Soros is the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely confident, taking a loss doesn’t bother you.” – Stanley Druckenmiller
The reason I am emphasising the ability to take loss is because then you will no longer be burdened by the need to buy the stock, and not incur loss because you are holding shares.
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Yes, I assume that was the main purpose of the trade (at the time, the stock was trading over $130) - to avoid the 110 call being exercised in 2 weeks from today and losing the stock.
Most of the time, I look at option trading differently. Perhaps that’s because I always keep a large amount of cash available in my account because I like to have at least 5 years of expenses in cash. And that excess cash will always cover the amount required to be held for naked options. Also, my naked option position is generally VERY small compared to my account size anyway. Right now, the amount of cash required in my main account to cover naked options is less than 5% of the total cash (money funds + T-bills + CDs) balance. IRA accounts are different, the cash required for a naked option is the full exercise price, so I don’t usually use IRA accounts for naked options. Okay, that was long winded, back to the topic at hand.
So I look at “cash generation” in the context of months and years, not “right now”. Yes, you bought the 110s for $2040, and sold the 120s for $2425, and that added $385 in cash to your account. However, looking at the full trade, it appears that you bought (effectively or actually) the stock for $10,754, then sold the 110 call for $495, then bought [back] the 110 call for $2040, and sold the 120 call for $2425. So the total cash flow in the account is -10754 + 495 - 2040 + 2425 = -$9,874. So the total cash effect on the account so far for the entire trade is $9,874 of cash was removed from the account. But you own 100 shares currently valued at $12,500 and if the option were exercised, you would get $12,000 for them. So $12,000 - 9874 = $2,126 profit. Of course, you could skip all the options and simply sell the stock at $12,500 - $10,754 = $1,746 profit. The options added only $380 of profit in this case.
Furthermore, with a volatile stock like this one, the stock could easily be 100 or 160 in September. At 100, all the remaining option premium would be yours to keep, but the stock would have a loss of $754, but you still get to keep it and write new options on it. At 160, you lose the stock (or roll the options again), but either way, you lose the stock gains from 120 to 160, or $4000.
In my experience, the best loss takers are the folks who trade futures, especially currency futures. As soon as the trade goes against them, they are out, they take the loss, and start anew with the next trade. It’s amazing, they set the stops right away, and the loss gets takes almost automatically. And they don’t care if 80+% of their trades are losers because they limit their losses to small amounts such that the winning trades more than overcome that multitude of losing trades.
I think it depends on what kind of stock. A volatile stock like Palantir may end up costing you more long-term by buying the slightly in the money call rather than buying the stock. Because you’re going to pay $30+ or so for that call (say, Nov 110), and as the months go by, the stock could unluckily end up much lower at the wrong time, and then you lose most of that $30+ permanently (sure you can roll, but it’ll cost even more capital to do so). Meanwhile, if you bought the stock for $120, and it drops temporarily to $90 or 100, you can wait for the next upswing and then continue your trading. The benefit, of course, is the leverage afforded by the option - $30 capital tied up instead of $120.
Lots of loaded assumption. I don’t understand why you are going all the way to Nov? On a high volatile name, you should not go beyond a quarter earnings. Also, why you assume the stock drop is not permanent. When the stock declines the premium will not go to 0 immediately, you can continue to write calls against that, also, you can close the long call and recover some part of the premium. Your assumptions shows there is no risk management in place. This is not how real life works or a trader would/ should think.
You are afraid of premium loss on the call you are buying, and think buying the stock preserves the capital because the stock will rebound. This is the mindset that I talked about loss taking…
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Because the amount of leverage they employ. Typically they use 50x, to 200x leverage. So they have to have tight stops and have to be closing ruthlessly. They cannot wait for the currency to rebound.. they will be wiped off.
You need to understand your risk profile, and your trade and set risk management accordingly.
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Because you said “a few months out”, and he’s selling September calls. So the shortest “few” months out would be two, that’s how I got November … two months out!
It doesn’t, that’s why I said you lose “most” of the premium instead of all of it. When the stock drops to $90, and two months pass, that 120 strike option that cost you $31.80 is suddenly under $10.
No, what I mean to say is that the premium on the long call loss has no chance of being recovered as you get closer to expiry. While the stock price loss has some chance of being recovered if the stock goes back up again. And that is, of course, the price you pay by using options for leverage. It’s no mystery, it’s just how they work. The point is that for a very volatile stock like Palantir, this technique has additional risk. Of course, the whole reason that stock is being used is because it is volatile, that’s what gives you the nice juicy prices on the calls you sell! I would think that on a less volatile stock, this technique would be great, buy a 3 month out call a little in the money, and then sell weeklies at relatively conservative levels until 1 1/2 months remaining on the long call, and then then roll it all out a few months and do it again. Might work on something like Berkshire? I wonder if it would be worth modeling the trade?
I’m trying to figure out what the message really is. Don’t do options? Don’t do volatile stocks? Something else I missed?
The Captain
For me it reinforces that selling options is an income strategy, whereas buying stocks is a capital gains strategy.
ralph
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Thanks for the explanation. That’s really intriguing. I might do some paper trading to see how it works.
If you don’t mind, why do you buy the call slightly in the money? I would think if you wanted to lower the time degradation some, you would buy deeper in the money. Just thinking out loud so to speak.
Blockquote
Hey Captain,
Hope you don’t mind my 2 cents.
Using MarkR’s numbers. IF PLTR is above 120 when when the calls expire that will be a 19.7% profit. extrapolate that annually and it’s 41.1%. I think anyone of us would take that. However, that comes with a big if.
Selling Calls that far out on PLTR scares the hell out of me. Too many variables out there that can affect the price. I don’t want to speak for anyone else, but I think that’s what they’re alluding to.
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Risk Management: The Foundation of Options Trading
The deeper you go in a trade, the more capital you deploy—and naturally, the more you put at risk. Risk management isn’t just a concept; it is the core principle of successful trading.
Let’s walk through a conceptual example—not a real trade—illustrating how to construct a trade within a defined range, while managing risk at every step.
Dollar General just reported solid earnings, and the stock responded positively. A trader believes the stock may now consolidate between $110 and $116, with a potential breakout above $116. However, they are also aware that one good quarter is not enough and DG still faces the tariff, execution and economy risks.
The trader wants to structure a trade that benefits from the consolidation range but is protected if the stock moves against the thesis.
Trade Structure (Call Diagonal Strategy):
- Buy: July or August $110 call
- July call: approx. $625 debit
- August call: approx. $780 debit
- Sell: Weekly $116 calls against the long call
- Roll weekly, collecting premium
This strategy earns from time decay (Theta) and the expectation that the stock stays within the $110–$116 range. Weekly sales offset the cost of the long call and provide income.
Why Weeklies?
Weeklies decay faster. In a range-bound setup:
- You can harvest premium faster.
- If the stock hovers below $116, you keep the premium without assignment.
- If it spikes above $116, you can roll, close or let it get called
Why Not $100 Calls?
An alternative is to buy a $100 call, which aligns with stronger technical support. But this is more expensive. If the stock drops and breaks $110, yes—it may find support at $100.
To offset the cost of the $110 call (if worried about paying too much premium), one can:
- Sell a $100 put
- This collects premium while preparing you to own the stock at a lower price if assigned.
- If the stock breaks $110, you now assess whether $100 holds. Based on that, you decide to add exposure, roll, or exit the position entirely.
Mindset Shift: From Return to Risk
Most retail traders obsess over how much profit they can make. But real longevity comes when you reverse that question:
“How much can I lose?”
This risk-first mindset helps you:
- Protect capital
- Build resiliency
- Survive and adapt across market cycles
Ask yourself: Are you a casual options trader using strategies to enhance returns on long equity positions, or are you using options as a primary investment/speculation vehicle?
If you choose the latter, risk management becomes non-negotiable.
Selling Options = Writing Insurance
When you sell an option, you take on an obligation. That obligation is backstopped by your capital. This is exactly like writing insurance. If the worst-case scenario plays out, you’re on the hook.
So:
- Be well-capitalized or trade within your capital, don’t overextend.
- Manage those obligations with precision.
- Understand the margin and assignment risk.
There’s also a philosophical shift:
You might have a strong fundamental view—but the market moves on price, not always logic. Momentum, sentiment, positioning—all these can temporarily overpower fundamentals.
I say this from experience: I trust my fundamental work, and I bet big on it. But I know this is also a liability. The market doesn’t owe me validation. And to win, I must let data—not comfort—lead. To be a successful trader, you must be willing to follow the data—even if it takes you outside your comfort zone.
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We are here to chat! Chat away! 
Yogi Berra comes to mind! “In theory, theory and practice are the same. In practice, they are not.” My Covered Call Selector shows incredibly high CAGRs – that’s the theory! But in practice stocks don’t play by the rules, they meander all over the place, volatility! Learning to manage option positions is a big help, taking profits early when warranted and rolling options up or down and out. That’s what I’m concentrating on learning just now.
Learning to roll options mitigates the problem with longer term expiration dates. One reason to prefer closer expiration dates is that the rate of decline of time value increases as expiration approaches. Even AI figured it out:
AI Overview
Yes, one reason to prefer options with closer expiration dates is the accelerating rate of time value decay as the expiration date approaches.This is because there is less time for the underlying asset’s price to change, making it harder for the option to become profitable. As a result, the option’s price (or premium) declines more rapidly as it nears expiration.
The Captain
The Option Rolling screen is coming along nicely. I did a lot of debugging these past few days…
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No message, just thinking out loud. I like to discuss things back and forth as a way to learn more about stuff …
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This is an interesting trade. You spend $625 to buy the Jul 110. Then, assuming the stock stays roughly within the range, let’s say you collect about $75 each week for 5 weeks by selling the weekly 116, that comes to $375. Breakeven is if the stock ends on Jul 18 at 112.50, above that you have a profit, below that you have a loss. Obviously you may not keep all of this in place until then, but still, this is the breakeven point for the overall trade. If the stock jumps early, let’s say to 116 in week 2 or 3, you probably would choose to sell higher strike weekly calls (to avoid them being exercised) perhaps at 118 or 119. Or, of course if the stock moves up enough, and quickly enough, you may choose to sell the 110 call at a nice profit and close the trade at that point.
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Generally post earnings jump holds unless some significant negative catalyst develops. This is the reason I don’t like to hold options that spans earnings, unless you expect earnings to be catalyst 
So these type of spread trades offer well defined and limited risk with 20% to 50% profit potential. The negatives are bid-ask spread, regular maintenance, and trading commissions.
This is just an example not my actual trade. The actual trade I did on $DG is before the earnings, as I expected positive earnings.
It is 10 contracts of
Bought Jan 26 $115 call $6.21
Sold Jan 26 $125 call $3.94
Net price $2.27; or $2270
Post earnings the stock moved up and I sold 5 contracts for $4.01, thus took out $2000 and the cost of my remaining contracts are $0.55 per contract. So I have further reduced the risk and can see if the stock potentially breaks above this current range and reaches $125, if not I may choose at some point to take profit before next earnings.
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Good! Yesterday I was thinking about keeping an option position near ATM alive by rolling it up or down, as the case might be, to make money not just on the premium but on the capital.
- When a call is ITM, roll it up to or near ATM
- When a call is OTM, roll it down to or closer to ATM
The idea is that rolling up you are more likely to earn the capital (higher strike price) while rolling down you increase the premium without losing capital. Much too complicated to do the math in your head, a spreadsheet or some other tool is needed.
What do you think of this idea?
The Captain
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When you roll up, you are adding some capital into the trade … in return for a higher strike price and a lower delta. Look at Palantir for example (Jul), if you have 120s and roll up to the 130s, then you will put in about $5.30 a share or so.
But if you really look at this trade (not the whole trade, just the rolling up part of it), in effect it is simply a Bull Call Spread. You are [effectively] buying a 120 and selling a 130 for a net debit of $5.30, maximum loss is $5.30 (at 120 or below), maximum gain is $4.70 (at 130 or above).
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- One problem with this logic is that it assumes a dead end at $130. Why not keep on rolling if warranted?
- Why not roll up and out to have a positive cashflow?
Palantir position
The yellow column is buying back the open call
| Date | 02/18/25 | 03/12/25 | 06/04/25 | 06/04/25 |
|---|---|---|---|---|
| Cost | 122.28 | 116.21 | 116.21 | 131.75 |
| Premium | -6.07 | -4.90 | 15.54 | -24.20 |
| Net | 116.21 | 111.31 | 131.75 | 107.55 |
| Exp date | 03/14/25 | 06/20/25 | 09/19/25 | |
| Strike | 125.00 | 110.00 | 110.00 | 120.00 |
| If called | 8.79 | -6.21 | -21.75 | 12.45 |
| Rate | 7.56% | -5.34% | -18.72% | 10.72% |
| CAGR | 115% | -16% | 0% | 18% |
Is the March 12 trade questionable? You have to play the cards you are dealt. As the stock fell in February I bought back the $125 strike call. Why not pick up some cash? I sold the $110 strike call. Then PLTR bounced back, time to roll up and out. By now the cost basis is down from $116.21 to $107.55.
The strike price is irrelevant until the option is exercised. Calls on stocks that don’t pay dividends are highly unlikely to be called except at expiration.
What now with PLTR? Depends:
- If it goes up, roll up and out?
- if it goes down, roll down and out?
Either reduces the cost basis but up and out is better.
The Captain
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It’s not a “dead end”, it’s the maximum gain point for that individual trade (buying the 120 and selling the 130). Of course you can keep rolling. If you buy that 130 and sell a 140, that’s the equivalent of entering ANOTHER bull call spread (BCS).
I think it all depends on how much return you want, and how quickly you get it. When I sell BCS, I usually like to wait until it reached 90-95% of maximum value. That usually happens relatively close to expiry, unless the stock really rises quickly. But if you’re willing to take half or two thirds of maximum value, then you can exit that trade and roll up, and out as well if desired. But this is always the case for BCS while the stock is rising. I did those trades with Apple options for a few years while the stock was almost constantly rising. It worked very well for most years, except as I recall 2015 and 2022 where those trades mostly resulted in losses.
Yes, of course, if the stock is moving up and you are effectively trading BCS, you will definitely have positive cash flow! It’s when the stock stops going up that that cash flow dries up, and may even result in actual losses.
I’ve been doing this with puts. For stocks that I own, and that I am willing own more of at certain prices, I sell puts [almost] every month. If the put expires worthless, I count that cash flow as an effective reduction in basis for the stock. And if the put is exercised and assigned, I get to buy more stock at a price I like (and at a slight discount to market price at the time I decided to make the trade). For example, I’ve been buying OXY (coat tailing on WEB) for a few years now, and obviously I am in the red on that trade. However, I sell puts on it almost every month, and sometimes the puts get assigned, and sometimes they expire worthless, and the cash flow from all those expired worthless puts have reduced my effective basis quite a bit, making the amount in the red lower than it would have been had I simply bought the stock and held it. Meanwhile, I also accumulate more shares each year at lower prices, lowering my overall basis. If the stock starts to rise someday, the puts will almost always expire worthless, and the trade might become profitable at that point.
Almost never (and for European options, definitely never because they can’t be exercised until expiry). There have been a few cases where options have been assigned to me early, and I always post about that here because it is so odd that someone would be willing to literally throw away even a small amount of time value by exercising rather than selling an option that’s in the money. Most recently, last August, some Disney puts were exercised and assigned to me with 2 weeks left until expiry, there was no ex-div event, and no other event, just someone willing to throw away 70 to 90 cents of time value. To each their own I suppose.
Yes. But sometimes the stock doesn’t go up, or worse, goes down. Then rolling can cost the investor more capital. Sometimes it can eat up a few months of previous cash flow!
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Let me sum up:
- I sell covered calls to generate income
- Every trade has to generate cash which rules out rolling up without rolling out
- Option chains have hundreds or thousands of calls which makes it very hard to find the best one without a good tool, the reason I created the Covered Call Selector. Rolling options is more complicated than just buying and selling options which is the reason for the writing the Covered Call Roll Selector (work in progress).
- The Roll selector must find the trades that yields the highest income considering premium and capital gains (strike price less current stock price). This is working but needs some indicators to rank them.
- It seems to me that the strike price should be close to the current stock price.
- There might be future refinements as I learn to use the tool
The Captain
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