- You are severely capping your upside gain and potentially risking a large tax hit if you get liquidated. If you're up enough on your stock the question is less do I want 1k for my 1k in stock and more do I want 800 for my 1k in stock because of taxation.
- In the reverse case where the stock takes a nosedive you can't "cut your loser" like you would with a traditional company. Because there's still a massive risk that if elon mush decides to take a stake or the shoe company randomly pivots to AI that the share price explodes. If that happens and you tried to cash out at a lower price then you still owe the contract 100 shares. You could repurchase the the call at a lower price but you're still down at that point.
TLDR: Covered calls limit upside gain and force you to ride out downturns for pennies on the dollar.
Covered Calls seem terrible for the average retail investor. Let me know if I'm thinking about this wrong.
byu/ActuatorDisastrous29 ininvesting
Posted by ActuatorDisastrous29
2 Comments
Yeah pretty much
Covered calls are a way for people who only bet long to buy protection. People with lots of shares will sell covered calls if they think the stock will go down or sideways in the short term. Then they can use the premium to buy more of the stock. As long as the strike price is set reasonably, there should still be a profit involved no matter what. Worst case scenario is you get called away (sell 100 shares at whatever profit you predetermined to sell for).
I would wager covered calls are more often utilized by people with large positions/portfolios.