Writing covered calls works very well unless you are in a market with exceptional returns. I like writing calls on positions 10% out of the money with a call date approximately 6 months away.
Curious as to why you don't like covered calls right now.
The answer is basically the risk is just not at all worth the reward anymore. But let’s take a look at a real world example.
You guys are talking about AT&T. So that will be the example used.
At the time of writing, $T is currently trading at $30.00. The June $33 Calls are trading for $.70.
500 Shares of $T would cost $15000. (500 shares is the amount I would recommend for a $1m portfolio – 1-2% of the value per a single stock position). The income you would receive on your calls would be $.70 x 500= $350.00. You will also receive 2 dividends over the next 6 months (likely to be $1.00 per share so that’s another $500 of “income”. The cost of those shares is essentially $14150.
Since it’s impossible for me to know the future share price of $T 6 minutes from now much less 6 months from now I’ll put it at a range- $20-$40. And that’s where we need to see if taking this position is worth it.
(1) $T= $40. At $40, the shares have been called away at $33. The position did make $1.70 from the calling writing + dividends + $3.00 of share value increase. Total profit is $4.70 x 500=$2350. ROI= 15.6%. Without the CC the profit would have been $11 per share ($10 stock rise + $1.00 dividend)- $11 x 500= $5500. ROI= 36.6%. Verdict. CC worse than Long Stock.
(2) $T= $35. At $35, the shares have been called away at $33. The position did make $1.70 from the call writing + dividends + $3.00 of share value increase. Total profit is $4.70 x 500=$2350. ROI= 15.6%. Without the CC the profit would have been $6 per share- $6 x 500= $3000. ROI= 20%. Verdict. CC worse than Long Stock.
(3) At $30, the shares are still held. The position did make $1.70 from the call writing + dividends. Total profit is $1.70 x 500=$850. ROI= 5.6%. Without the CC the profit would have been $1 per share- $1 x 500= $500. ROI= 3.3%. Verdict. CC better than Long Stock but not by any significant margin.
(4) At $25 ,the shares are still held. The position did make $1.70 from the call writing + dividends. Total loss is $-3.30 x 500= $-1650. ROI= -11%. Without the CC the loss would have been $-4.00 per share- $-4 x 500= $-2000. ROI= -13%. Verdict. CC better than Long Stock.
(5) At $20 ,the shares are still held. The position did make $1.70 from the calling writing + dividends. Total loss is $-8.30 x 500= $-4150. ROI= -27.6%. Without the CC the loss would have been $-9.00 per share- $-9 x 500= $2500. ROI= -30%. Verdict. CC better than Long Stock.
So CC Writing is only better when the stock is at break even or underwater. And the question I’m going to ask my self is: why do I want to take a “complicated” position in $T when the best outcomes for that position vs just long is for it to be a loser?
In addition taking the position means that one is now committed to not adhering to any type of trend identifying discipline/stops?
If you’re looking at the position from the view of ((3) from above- $T is flat for 6 months which provides an Annual Return of 11%)? Then, imo, you are looking at the position incorrectly as a low odds chance of occurring, and far more likely that (4) or (5) would be the end result vs. flat. Of course $T could range between $27.50-$32.50 which is the sweet spot of this trade. But again, I’m going to ask myself, “in THIS market is that a high odds play and the best use of funds?” And if I truly believe this is the range, then is the CC the best options strategy to employ? (hint: Answer = No)
Easy to remember Risk v. Reward is Risk $1.00 to make $2.00. In the (3) v (5) scenario you are risking $8.30 to make $1.70. That’s the coach who will go for it on 4th and 15 from their own 20 yard line up by 2pts with 1 minute to play.
People are looking for ways to mitigate losses in a volatile market, and see CCs as a potential answer. CCs are great if you own lots of shares (LOTS) at a very low cost basis and can write deep OOM Calls. Have 1M shares at a cost basis in the single digits, and we can write April 37's for a $nickle so you can have some spending money for a couple of months and manage the position without fear...go for it. But in general CCs are easy to apply and what happens often is you will wind up worse off than not owning the position at all or owning the position naked.