Ryan

After graduating with $75,000 in student loan debt, Ryan began a professional career in finance, aggressively saved and invested and became a self-made millennial millionaire in early 2019. He holds a Master's degree in Computational Finance, a Master's degree in Economics, and a Bachelor's degree in Mathematics. His two passions are investing and traveling.

5 thoughts on “Sell Covered Calls For Monthly Income? 4 Reasons To Avoid The Hype

  1. For a while I was making money on these and thought it was some brilliant strategy. What you describe is exactly what happened to me and then I was stuck. I wish I would have read this article before giving it a try!

  2. Ryan – superb article on options. Superb. My background is I retired at 58 after holding executive positions in a Fortune 500 firm. I immediate took master’s courses required to sit for the CFP Exam & passed it in 2018. What is your opinion of how I use options below? I’ve been doing this for 6.5 years.

    The covered call / cash covered put approach I employ is to use them as a portfolio rebalancing strategy. Essentially, I see it as getting paid to rebalance. I periodically rebalance the portfolio when it approaches a certain threshold (say 55% – 65% equity + private placements). Since I would rebalance anyway I sell covered calls on a limited portion of the equity portfolio (~20% and on ETF Indexes) at the appropriate time (using differing expirations & strike prices to manage assignment risk) under the assumption that approximately 20% (on a dollar weighted basis) will be called, thereby letting assignments perform the rebalancing for me…all the while collecting a premium to do it. If the calls expire out of the money, then there will have been no need to rebalance anyway and I still collected the premium. Same approach on selling cash-covered puts which I employ if the portfolio falls below 55% Equities / Private Placements.

    Feel free to be honest with you commentary without the need for being overly diplomatic.

    1. Actually I think this is a good idea since you are using options for a purpose. As long as you buy your rebalances on the same day as option expiry so that your cash inlay matches the cash outlay.

  3. This was an interesting article. I read it twice because I wanted to make sure I fully understood it. Most of the articles or videos about covered calls and cash secured puts on the Internet are promotional and don’t really discuss drawbacks or shortcomings of the strategy.

    It does make sense that the risk premium would be accurately priced to reflect the call or put so that if you sold it, you’d get essentially fair value for the transaction (and probably less than that after factoring in costs and commissions). Another major drawback from buying and selling the same call/stock combination would be wash sales, which are a pain from a tax perspective. Not sure if most investors even understand wash sales and how to account for them.

    Here is an aspect of the article which does not make sense to me. Suppose it’s true that you can’t systematically make better profits by selling calls or puts because their value reflects the opportunity fairly. Then why would so many people still do it? You’d think that over time they’d see it was not a successful approach and would just switch to something passive like buying a stock index fund. I know I would not keep selling calls or cash secured puts if it was not profitable. I’d drop it fairly quickly. So that is something I don’t get. Why would professional and retail traders keep doing an activity if it was clearly not successful in their own brokerage accounts?

    1. It’s a good question, and I think it stems from the trader psychology. Most traders have been shown to lose money over time, or at the very least not outperform the index but they continue trading despite it. Of course anyone can develop a strategy that outperforms the index, or the covered call index, and I think that most people think they’re gonna be that guy when the averages just don’t support it. Enough new people come in to replenish the ones that are leaving because like you said there is a lot of promotion online. Also, I think a lot of people will accept underperforming the index for a number of years if they think that the strategy will outperform over time.

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