Selling covered calls to generate income is something I'm experimenting with, but if the stock price Falls more than the premium and Rises too quick when it bounces off the bottom won't you end up with less than you had to start despite collecting the premiums?
It seems similar to concentrated liquidity in defi, sure you collect premiums on the way up and down but if it goes down and back up for some reason you don't have as much as you started with…
And buying longer duration puts to protect against this seems more expensive than you would make from selling calls every week
NAV Decay on selling covered calls?
byu/ProudChoferesClaseB inoptions
Posted by ProudChoferesClaseB
1 Comment
You are bumping into the dirty little secret of covered calls: the premium looks like “income,” but in reality you are just selling upside optionality to cushion downside.
If the stock tanks, your call income is a rounding error compared to the drawdown. If it rips back, you capped yourself on the recovery. Net result: yes, you can easily end up worse off than if you had just held the stock.
Think of it as a trade-off, not free yield. CCs work best in chop, grindy, sideways markets where you are bleeding from theta if you are long calls but clipping coupons if you are short them. In strong uptrends or violent selloffs, they underperform. In any case, the ultimate metric is to compare the implied volatility baked in the call you sell versus the risk realized (historical volatility).
Pros know this, which is why they frame CCs as “short vol” rather than “income” (except maybe fund managers, but that is a different story.) And why they pair it with other structures (put spreads, collars) rather than hoping weekly call sales magically turn a falling knife into yield.
You are right: buying long puts to hedge is usually more expensive than your call sales. That is the economics of crash risk. in practice, people often sell a few more calls (against stocks they own) to finance the puts. But again, there is no free lunch and you have to decide what is best for you and having data always helps make better decisions.