Anyone know how safe it is to make money on Covered Call Options?

Question

I have been studying Options for about a year and a half now and have been seriously burned by buying Options. I am looking at selling covered calls and want to know how risky this is?

Answer 1

As a former stockbroker, I can tell you that selling covered calls is a very conservative investment. It's suitable for retirement accounts... that's how conservative it is. Here's an example: Say you own 100 shares of XYZ of which you paid $20. Sell a covered call on XYZ at 25 and earn $125. As usual, most options expire worthless... so you still own your stock and you have made $125. But let's say you do this over and over again... you can see how conservative it is and how much cash it can repeatedly put in your pocket. Now let's consider that you again sell the same covered call but the stock moves upward to say $28 a share... you'll earn $25 per share for your covered call plus the $125 for a total of $2625 ($2500 plus $125). (Reminder: For simplicity I have not included commissions... realize those will effect your profit.) As you will note from my example, the person who bought your option made $175 (he bought stock at $25 and it's worth $28... that's $300, but he has to minus the $125 that he paid for his option to determine his profit on the entire deal). Your risk is that the stock could go through the ceiling... so you limit your upside potential a great deal; however, in all likelihood, the stock is not expected to jump tremendously. But you and I both know that it's possible... this is why I haven't done it. I own a stock for growth, and I'm hoping for a nice profit by selling my shares rather than playing the options game.

Answer 2

There are similar types of safe option trades too. One could read books about them, or take a course from one of those trading traing companies. Among them, BETTER TRADES is better than the others. The instructors do live demos with his portfolio in the real market and show a bunch of trades he personally has done recently and correlate with different trading strategies. In the final analysis, one needs to learn how to pick the stocks and options, know the timing, and understand the importance of limiting your loss before buying options.

Answer 3

In my opinion, it's one of the safest trades. Covered calls are safe because the underlying stock is already purchased by you. The only drawback would be if the stock skyrockets and you are called at a lower price. Needless to say, a 15% profit in a year would be considered very good.

Answer 4

All investments involve some form of risk. Mike S is correct in his description. Selling covered calls is a lot less risky than buying calls.

Answer 5

They are safe as you already own the underlying stock and won't have to buy the stock if the option is excersiced. The worse thing would be if the stock goes up dramatically then you've just missed on making a huge profit.