Does anyone here sell covered calls for passive income? Thanks to all the GME drama, I've finally started learning about options. And one that I like in particular is selling a covered call: it seems like an easy way to earn passive income on a stock I plan to hold long-term. It seems like there are only two downsides to selling a covered call:
1. You are stuck with stock if it corrects or crashes before expiration.
2. You miss moon if it goes well above your strike price sale.
Now to me, these two things are be mitigated with the following
1. You buy a solid company, confident it will rebound after a correction or crash.
2. You set a strike price you are OK with selling - in the end you still profit + collect premium.
Am I missing something here? It almost seems like too easy of a way to make something like $10K / month. For example:
STOCK HOLDING: 1000 shares
CURRENT PRICE: $38
MAR 19 2021 45 CALL PRICE: $6
This means I can sell 10 contracts of this stock, collect $6000, and all I have to do is wait until March 19th for the option to either expire worthless, or sell my stock holding at $45 potentially before then? But with the risk of this stock going to say something like $20 before then? (which is slightly offset by collected premium)
Now I'm, guessing that if calls are "expensive", it's one of two things or both:
1. Lower cap, volatile, less established (AAPL calls don't generate nearly as much income for example), sop higher chance of correction / crash
2. Market is betting the stock will rise
Other than that, to sink ~$100K into this strategy and generate something like $10K every 1-1.5 months... seems almost to good to be true!? Am I missing something?
I sell covered calls and cash secured puts for income. I'm not usually super aggressive like some here. But I generate about $10k to $100k a month from my options selling depending on how aggressive I am or how volatile the stock or market is. It's why I don't care about dividend stocks. I make my own dividend like income from option selling. Sometimes I only sell covered calls. Sometimes just cash secured puts. Or sometimes both at the same time. Or nothing at all. It's why I love TSLA. The IV on TSLA averaged about 80-90% all last year so its options were very expensive. TSLA can have crazy swings. TSLA option prices have come down some since it joined the S&P 500 but the IV is still way higher than something like Apple.
You can sell shorter dated covered calls if you have deep ITM leap call options and use that like stock. So it doesn't just have to be stock your holding.
If you're planning to hold the stock, the big risk is you cap your max gain by selling covered calls and the stock moons. You can try to minimize the pain by buying higher strike option and basically creating a spread. You can also roll the option to further out expiration and higher price and try to ride out the temporary spike and possibly make even more money. You can also sell cash secured puts to collect premium to offset some of the potential money lost. Remember, stock can only go up or down. It can't do both at the same time. So if your calls expire in the money, the puts you sold should expire out of the money unless you did straddle option. Or you could simply buy the call option back higher and take the loss instead of losing your stock. I do that if I have lot of capital gain in the stock and want to try to keep the stock for long term capital gains. If your stock gets called away because the call expired ITM, then the money you lose to short term capital gains tax by selling your stock could be lot higher than any loss you take on buying back the call you sold. I've done everything above and the only time I really buy back the calls at a big loss is when I don't want to lose the stock because of the massive short term capital gains on the stock.
But be careful and always be mindful of the risk and don't overextend yourself. Selling covered calls and cash secured puts are not free money people will try to lead you to believe. It carries lot of risks but you can kind of control how much risk you want to take with strike prices and expiration dates you pick. You can't account for craziness like we have seen recent week with shorted stocks all going crazy.
I sold Jan 2022 TSLA $1,400 covered calls. I normally don't sell covered calls that far out but I felt I would be ok with letting my TSLA shares go at that price. I got paid over $140 per share it's really like selling it for $1,540 by Jan 2022. I sold 10 of the $1,400 calls so I got paid over $140,000 in premium. I also sold some $1,000 calls too which I'm little more nervous about but I just look at it as partial downside protection. The covered calls I sold shielded me from lot of the TSLA drop on Thursday and Friday.
And I sometimes sell naked calls. That's the riskiest of all but sometimes the call prices can go absolutely crazy when TSLA is on one of its crazy runs. People here shouldn't do it. I really shouldn't do it. I've been burned badly before. But it's tempting sometimes when you see crazy premium you can collect on super far out options that's expiring like in 1 or 2 days. But don't do it. Or you'll end up like Melvin Capital with their GME short. Just get killed if Black Swan event happens.