Are you saying “making money from selling covered calls is free money?”
It’s not free money, over any time horizon.
When you sell an option, you are selling volatility. That volatility has value, that’s why dealers are willing to buy your calls and have a huge business doing so.
I’m using “free” rather flippantly here. It would be better stated that I’m not sure I believe you can reliably sell that volatility repeatedly over the long-term without being “bitten in the az$” (that’s the technical term) eventually.
In any case, my experiment continues. What is likely to happen is that over the years I will slowly increase the percentage of assets in this class of investment … and THEN get bitten in the az$. LOL!
For single stocks especially, it’s the risk that the single stock goes down appreciably relative to the income from the call - not really different than just being long the stock.
There is also risk of missing out on the stock’s upside, but I view that as a lesser risk if the goal is income.
Indeed, especially since the stock market has a bias to the upside.
DB2
Not for single stocks (at least one drawn randomly - versus a different sample weighting, like market cap)
Those are the risks. With a covered call, you get all of the equity’s downside (you can lose up to 100% of your investment, in theory) but a limit on the upside (you have no upside beyond the strike price). That lowers your expected return on the equity. But you get a certain payment via the premium in exchange for having that worsened position in the equity. You’re basically selling the potential upside in exchange for that fixed premium.
The only “catch” (that I see) is a collapse of the option’s underlying stock price. The upside is that the call seller loses less than the investor who only holds the stock.
Option premiums are not provided by “the market” in the same way as the stock’s price appreciation. The premiums are provided by the call buyers. In terms of the science of complexity, the stock market is a complex system that spawned an emergent property called the option market. Of course there is a connection, the “catch” mentioned above.
What the above says is that stock picking still matters, use stocks that will bounce back.
What I have noticed is that some stocks are better than others for selling covered calls. I don’t know what it is that produces the difference which is why my Covered Call Selector is such an important tool for me. It compares options not just in single option chains but across any number of option chains.
Maybe I should ask AI what it is that drives option pricing. Google AI was not much help, after eliminating the obvious the only major factor is the stock’s volatility, lots of bulls with money? Lots of bears with shorts? At the end of the day I don’t care, just
The Captain
Yes, volatility is important for option valuation.
The “catch” is that you’re selling all of your upside in the stock above the strike price. It’s a pretty straightforward trade. If you just hold the stock, you get all the downside and all the upside. If you write a covered call, you get all the downside and only some of the upside - and the person who gave you the premium gets all the upside above the strike price.
Only if the call is assigned. One does need to watch the position and roll it up and out as necessary. This is the reason I added a Covered Call Roll Selector to my Covered Call Selector. it finds the best calls to roll to.
I just rolled SMCI Jul 17 strike 27 calls to Aug 17 strike 28 and collected almost a month’s worth of expenses in premiums..
Good for them, we both make money. Guess who pays?
The Captain
No, you’re selling that upside regardless. Yes, you can buy it back before the call is assigned - but you have to pay to buy it back. The contract you enter into with the purchaser is that you sell them your upside above the strike price in exchange for the premium. That’s why this isn’t free money - they’re getting the rights to your upside in exchange for that payment.
TANSTAAFL. Covered calls aren’t some magic money-making machine. You get a premium that’s going to (generally) reflect what the market thinks are the chances of the stock going above the strike price. Your counterparty is betting the stock will go up by more than that and is willing to buy that upside from you. The premium will reflect the delta on that option.
Rolling it up and out is going to cost you more than your initial premium - and some cases substantially more.
As great as your selector is (and I do think it is pretty savvy), it cannot account for macro-economic factors or company specific factors that can dramatically impact options prices. I used to sell them on TSLA as well and all it took was one crazy quarter of ridiculous upside performance and my calls were assigned - at about $20 less than the current price. I still made something like 30% in a little over a month but I left another ~20% on the table. It would have cost me an outrageous amount to roll those at the time. The premium was not worth that ~20%.
Yes, you are selling the upside but there are two kinds of upside, realized and unrealized. Let’s do the math of covered calls:
You made $200.00. The buyer makes a fortune but you only have an opportunity loss plus $200.00 cash.
There is a risk difference between naked and covered calls.
The Captain
Looking solely at the premium you are right but you need to look at the whole deal. By rolling up and out you are paying premium to buy capital. If the math does not make sense you let the call expire and get assigned.
You had an opportunity loss, not a real loss.
That is a matter of opinion. As I have posted, selling covered calls is like running a casino. You don’t win all the bets but casinos are very profitable if run properly. If the casino never paid there would be no patrons. “You got to know the territory!”
The Captain
Of course. I understand that. But the “opportunity loss” still exists, and that’s the “catch” to selling covered calls. You’re giving up most of the upside when a stock moves sharply upwards, but you still have all of the downside if the stock were to move downwards.
And that’s a real cost. A covered call strategy puts you long equities. Equities have uncertain returns - sometimes they go up, sometimes they go down. Ideally, you make enough on the equities that go up to cover the losses that come from the equities that go down (and moreso). When you sell covered calls, though, you limit the amount you can earn from the equities that go up. Which can be very problematic when you’re long in equities, because while equities have a general tendency to rise in value overall, that mostly comes in the form of most equities that undeperform the market but which are offset by a few equities that go up a lot. And you’re selling away the “a lot” in order to earn a modest premium.
You get that premium in exchange for selling the upside, of course. If you’ve got genuine skill in picking stocks and options, you will (hopefully) get enough in premia and avoid the stocks that fall in order to beat the market. But that’s the test, and that skill is still required for covered calls to make you money. There isn’t any structural advantage to using covered calls as an investment strategy, there’s no free lunch here. If you don’t make the right calls, the stocks that go down will lose you more money than you get from the premiums and the returns on the stocks that go up, because you’ve sold too much of the upside for too little premium.
No. 20 times no no no no.
The Captain
Of course it is. It doesn’t matter how many times you say no.
If you sell your upside for less than it’s worth, it will cost you money and reduce your overall returns. It doesn’t matter whether that cost takes the form of lower winnings rather than losses. Your portfolio returns are the aggregation of your winnings and losses, and a smaller winning reduces your return just as much as a similarly-sized larger loss.
That’s the downside to selling covered calls. You cap your winnings on the stocks that go up, while you have uncapped losses on the stocks that go down. The cap on your winnings is the “catch” - you’ve sold some of your upside in exchange for the premium, and if sell it too cheap your returns will get eaten up by the (inevitable) instances when some of your stocks go down.
What matters is the end result, not any one trade. I track my portfolio carefully. I know what the portfolio was at any time, I know the premiums collected, the money spent. The Covered Call Selector had an initial copyright date of 2019. From Jan 2020 to the present the CAGR of premiums collected were around 17% of the portfolio but not all the portfolio was dedicated to covered calls. These facts trump your negative generalities.
It doesn’t matter how many times you say not so. 
The Captain
How? I suspect you misunderstand the point.
No one’s saying you can’t make money selling covered calls. If you end up picking the right stocks and the right options, you can make money or even outperform the market. But that’s the condition. You have to do that in order to make money. There’s nothing magical about selling covered calls, as opposed to any other way to invest, no structural way to avoid the possibility of underperforming the market. Covered calls are a very simple trade: you’re just selling your upside on winners for a fixed premium. If you do it at the right price, you can make money over time; if you do it at the wrong price, you can lose money over time. Or outperform/underperform the market, if you prefer.
What was the performance of the portfolio dedicated to covered calls? You can’t just look at the premiums - you have to include what happened with the underlying securities as well to get a sense of your investment performance using this strategy. Because again, the returns of a covered call strategy aren’t just a function of the premiums, but also what happens with the underlying securities.
Of course, if one has the skill to pick the stocks that will go up and avoid the stocks that will fall, then more money can be made by just buying the stocks that are going to go up.
DB2