⚠️ The Risks Of Selling Covered Calls - Do This Instead & Maximize Premiums

Are you considering selling covered calls to earn income from your stock investments but wonder about the risks? Join Rick, a Wall Street Journal best-selling author with over 20 years of experience in trading stocks and options, as he explores the potential risks and strategies of covered call writing. Despite its popularity among investors, this strategy is not without its pitfalls.

In this video, Rick explains:

✅ What covered calls are and how they work using real-life examples and current market scenarios.
✅ The major risks of selling covered calls include opportunity loss and assignment risk.
✅ Tax implications that can affect your earnings from covered calls.
✅ Practical tips on mitigating the risks of covered calls, including using option Greeks like Delta.
✅ Alternatives to direct covered call writing include investing in covered call ETFs

🔍 Whether you're new to options trading or looking to refine your strategy, this video has insights and tips to help you make informed decisions. Don't forget that while covered calls can be a lucrative strategy, understanding the risks is crucial to managing your investments effectively.

👍 Like this video if you find it informative, and subscribe for more insights on stock and options trading. Have questions or want to share your experience with covered calls? Comment below—let's start a conversation!

🔔 Stay tuned for more expert financial advice and ensure you're equipped to maximize your investment returns while minimizing risks.

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Skip ahead:

00:00 - Start
01:50 - Introduction
02:48 - Covered Calls Explained
05:42 - What Is Assignment?
08:23 - Opportunity loss.
11:12 - Tax implications
14:01 - How To Mitigate Covered Call Risks
17:42 - Use An Option Screener To Improve Your Chances
21:24 - What if I want to be invested in covered calls, without trading options?
23:16 - Conclusions

DISCLAIMER: This video is for educational purposes only and not financial advice. Always do your own research and consult with a financial advisor before making any investment decisions. All information and data on this YouTube Channel is solely for entertainment purposes. I'm not a financial advisor, nor licensed in any way to provide any financial advice. The information herein is based solely on my personal opinion and experience. All investments hold inherent risk, and the information provided on this YouTube Channel should not be interpreted as any kind of guidance, recommendation, offer, advice, or suggestion. Any ideas and strategies discussed on this channel should not be implemented without first considering your financial and personal circumstances or without consulting a financial professional.

[KpxUrz]

All valid considerations. In actual practice most of my covered calls represent solid income, and then I am able to sell new calls again. But I have been quite good at picking robust stocks, so a number of them move up so high as to exceed the strike price on the calls. In some cases, I decide to just let the shares be assigned. In other cases I bite the bullet and pay up to cover the calls, keep all the profits earned, and then resell the calls at a higher strike. Yes, there are a lot of considerations when venturing into options, but overall I have to say that I have no complaints about how it all works out over time. Steadily growing the portfolio. There is no free lunch on Wall Street. Just keep learning and being cognizant of all possible outcomes.

[roberts]

One problem the video totally failed to mention is not all stocks are suitable for selling covered calls. Before picking a stock you want to sell covered calls on, look at the option chain, specifically the volume and open interest. If both are low to zero, you aren't going to sell any nor be able to roll or buy to close. In this case, pick another stock. In general, the more popular the stock is, the better the market. Also applies to puts.

I've found as a rule-of-thumb, if there are weekly options, there is enough of a market. If monthly only, the market for options ranges from thin to non-existent.

[zoraster]

Covered calls are also tricky on taxes.

If you sell a covered call for less than 30 days duration your holding period resets if you were short term.

So if you had a stock for 11 months and wrote a 2 week covered call your holding clock would reset back to 0.

If you sell an ITM call, the duration doesn’t count towards your holding period to qualify for long term capital gains or the holding period for a qualified dividend.

So if you bought a stock in January for 30 and you’re sitting at December at 50 and are worried about the stock going down and you want to take profits but you don’t want to pay the short term tax rate you can’t sell a February Call at 40 to get you there since your holding period would be suspended for the duration of the call since you wrote it ITM.

[johnmaxwell]

I like JEPQ more than JEPI. They are very similar but JEPQ writes their covered calls 5-10% out of the money. In this scenario you get a little upside appreciation should the underlying go up in value. JEPI I believe would lose less in a bear market but you take the risk with the rewards. JEPQ typically pays out about 1-2% more in dividends, per month, than JEPI. Of course this is dependent on both the dividend payout as well as the price of the ETF itself. I've owned them both and would continue to buy either. They are both excellent, IMO.

[cole]

Nice overview!

But don't confuse "7% early assignment" with rate of assignment _at expiration_

Also, the distribution of the 7% is highly skewed -- basically 100% of those are for dividends (and short borrow fees when applicable)

Meaning someone might mistakenly think "7%" means they're very likely to keep the dividend on their stock when the call goes ITM, when that may not be the case (possibly causing them to miscalculate potential returns).

But you mentioned closing early and delta, so I wouldn't say there was zero coverage on this possible confusion point.

Anyway, good overview!

[OakSantosh]

My simple, no stress, profit making strategy is to sell OTM short strangles --especially for stocks I hold in my portfolio -- so I can get premium on both sides IE selling calls and puts simultaneously. This can also be construed to mean selling a combination of secured Put+ selling a covered call for the same stock at different strikes, .

[magicsmoke]

Can you please cover the real scenarios where you can actually lose money selling covered calls?

1. The stock goes above the strike price at or before expiration. Is your opinion to let us get assigned or to roll? Because the only real way to avoid a loss here is to let it get assign and then re-buy the shares to do the CC strategy again. If you roll, you are losing money, which is what I face more often than I like. I would like to pick a strike price further out of the money, but the spread is nearly worthless so it's like a no win scenario.
2. The stock is trading lower than when you bought it and the strike prices are lower than your purchase price of the underlying stock. If scenario 1 from above occurs and you get assigned, you're losing money. Whether you let yourself get assigned or roll, you're losing money. What is the best thing to do here?

It kind of sounds like your strategy with CC is not to hold a particular stock indefinitely like dividend investors would, but to use this options samurai tool to pick a stock for the duration of the CC and if it gets assigned let it go and start over with a new stock. Is that right?

[carsonc]

Ok... When you make your first covered call trade then the math works great. If your stock tanks then what happens? Because the way I see it, if you write another 20% delta covered call on the stock then the price that your shares could get called away at could be lower than what you paid for them? So that's a loss. Or if you stick with a strike price where you don't lose money if you are called out then the premium is practically nothing so now your stock has tanked and you're not getting premiums. How do you manage a trade where the stock has tanked?

[ednakh]

You said if my stock is called, I will get to collect the price at the strike price plus the premium? I thought minus the premium 🤔 can you confirm please? Thanks.

[cryptogirlusa]

Thanks for the video! I’ve been selling CC for years now and there are so many ways to manage these even if ITM or even after being assigned. Also instead of using CC as income I have been using them to compound shares or LEAPS, do you know of anyone also doing this? Maybe another channel, I posted some videos and so far noone have said they are doing the same. I wonder if others have the same idea.

[JohnSinclair-wujs]

What are your thoughts on SVOL? I’ve used it over the years for income, but sell it when IV is low and then buy again when IV is higher. I prefer credit spreads and try to keep a delta of 20 on the short leg

[shermanleung]

opportunity loss is NOT considered a risk. That is no difference than if I sold a stock and the price jump right after I sold. That happens a lot. There is no risk in doing a covered call IF you are planning to hold that stock for the long-term anyway. And if your stock got called away, then you can take that money and look for other opportunities.

[jiti]

Main risk in Covered calls is not stock going up but tanking, fa far more than the CC premium received

[alizeidan]

what is the max number of stock to trade options on?

[ramonbernalpara]

Thanks Rick for sharing your knowledge. What do you think about having LEAP Calls instead of Shares in a covered call strategy. Too risky?

[kohpearly]

I appreciate and learned so much with your teaching. I just started practicing on paper trade with selling covered calls. I sold a call DTE 24May at av price $2.51. Now my portfolio shows last price is 3.40 and the market is -325. Unrealized profit is -73. Interactive Brokers computation is so confusing. I seek your assistance to help me understand these figures if you can. Thanks in advance.

[KevinW-]

Fantastic Video. This clearly explains how to 'avoid' assignment by "Rolling the Trade". Also, great guidance on referencing the "Delta" prior to selling the Covered Call. These are two amazing tips not covered in other Covered Call videos. Thank You!!

[JDJay]

How do you handle covered call when the equity drops below breakeven? Do you continue on faith or try to buy protective put or roll down and out the covered call. Do you still consider even rolling up and out?

[wills]

The stock can go down and keep going down and you'll lose on the stock. However, i can NOT ever lose on a CC. How? Cause i sell the call at rhe price that im gonna sell at.
If i habe a stock currently at $25.04 that i bought at $22.71 then im out at $27. If the price gets to $27 then im out period. So, if i sell a CC at $27 and i get paid 13 cents per share? Ive just paid $13 i wouldn't have at otherwise.

[Sofie]

Hey 😊 What if you own less than 100 shares? Can you still do options? Calls or puts?