The PROBLEM With Covered Calls (Are They Worth It?)

Covered calls are one of the most popular options strategies that traders use, but are they worth it? In this video, we'll learn the dark side of covered calls, and understand what we're really doing when we enter one of these trades.

To understand the problem with covered calls, we'll look at a potential trade I could make with my SQ stock position and run through four scenarios that could play out after entering the trade.

0:00 Introduction
0:14 Covered Call Benefits
0:43 Covered Call Setup Recap
1:44 Example Covered Call in Square (SQ)
3:20 Scenario #1: Neutral Stock Price
4:24 Scenario #2: Bearish Stock Price
6:04 Scenario #3: The GOLDEN Covered Call Trade
8:00 Scenario #4: The PROBLEM Outcome
10:30 What You're REALLY Doing When Trading Covered Calls
12:33 How Covered Calls Can INCREASE Your Share Cost Basis
14:50 Don't Miss This Resource!

Covered calls can outperform simple buy-and-hold stock positions in many scenarios, but be mindful of the fact that you are agreeing to sell your upside on the shares when entering into the position.

I dislike the covered call strategy on stocks I'm holding with long-term intention. I don't want to be put into a situation where I have to buy back the short calls for a loss if I trade a covered call and the stock goes to the moon.

In short, I will only trade a covered call on a stock position that I truly don't mind selling at the given strike price of my choosing. Many options traders THINK they are ok with selling their shares at the strike price of the call, but change their minds when the stock rallies above the strike. Be absolutely sure you're ok with selling your upside on the shares of stock!

== Recommended Resources/Videos ==

[skobuffs]

Why not roll the contract if the stock goes up past your strike price?

[happyhamster]

I think the secret is setting a call price that you’re happy selling your shares at. That way along with with premium it would still be better than just owning the shares. Or could just buy back your own call option?

[mikestubeviews]

Really enjoyed the video( I know this is any older video) but in the 2nd scenario you list it as a loss but its only a loss if you sell it. Are you required to sell it? or you can still hold the shares and let them recover?

[lksaa]

Thanks for a great video once again but, but...

Scenario #2
You did not incur any losses, you made $1800 and are now down $7000 on the stock but you still have the shares.
This is only paper loss at this point not a real loss, you would now of course use the same shares to sell another call option.

Scenario #4
In my opinion it's pointless to speculate how much you could have made.
Every evening I could speculate how much money I, possibly, lost when I did not buy or short the biggest movers of the day.
Once you sell CC that's the price and possible profit you decided to be happy with and whatever happens after that is irrelevant.

[stormvo]

The best comments are just explaining how to get the best results even further from covered calls. Great audience, thank-you.

[craigharris]

Great video. I would add one another comment. The big advantage with covered calls is that your shares get called away sometimes and you realize the gain on the shares and collect the premium. Then you use a cash covered put to get back in at a lower price. If you just hold the shares as the price goes up and down and don’t sell the stock you never realize the gain. You just ride the roller coaster:)

[bozzicone]

could you explain the wheel strategy and which is the most profitable options strategy'?

[samareshgupte]

What kind of stocks are best candidates for Covered calls? Is it the high IV or great fundamentals of the company?

[hobo]

Can you make a video on the four types of broken wing butterflies?

[paulweldon]

Managing the position is important. Only short if you don’t mind losing the underlying

[wchristensen]

If you have enough capital you could have a buy order at the strike price you pick and assign those new shares to that option, so you don’t lose out on the gains while also keeping the premium.

[Nice-Y]

Hi Chris, any chance you could do a call/put ratio spread/backspread video?

[ThaRealERAQ]

when you select a strike to sell you need to look at the seasonality of the stock. If that is a hot time period, you need to go further otm or do shorter term expirations.

[gumbah]

You own the stock period ! And sold a call above what you paid for the stock! You collect a premium and we’re NOT assigned nor did you buy the option back avoiding assignment so it’s a win win period! Why make it more complicated by countin money you could have possibly made!

[riquezafinanciera]

He does understand the strategy behind using CCO

[danielharris]

I have made a truckload selling covered calls on Tesla this year. Can always roll them up and out if needed.

[LivePlayWatchPixels]

I think the only problem in cover calls is if you dont own the stocks to sell them, thats basically what I think the only risk, other scenarios are positive.

[mhmhmh]

I just want to say thanks for this video, hopefully you guys can actually figure this out, it's pretty cool once you do, lol

[millardbrown]

Once the price of the stock hits the strike price on the option, just close it or buy a call one strike above making it a credit spread or roll it out and up 4 weeks out.

[brendanquinn]

In this analysis the roll out was ignored. I mean roll out and up. It is an option on the position if it is managed at the appropriate time.