Covered calls (and the wheel) are solid strategies however, they tend to underperform the long-term buy and hold alternatives (while typically decreasing volatility). Why is this? Capping the upside. How frustrating is it when you identify something you like to the upside, place your wheel or covered call trade, only to see your thesis play out and fly past your short strikes while you've collected a few dollars on the short call and have limited capital gains potential. Traders interested in long-term growth of their capital can very easily create a balance between collecting premium and enabling upside potential by simply UNcapping the upside.
While there are absolutely scenarios where selling calls at a 1:1 ratio against the long equity position (if we want to maximize credit collection at the expense of upside, or if we want to unwind the position using the short calls, etc.) it's really important for it to be thought out because many traders simply default to 1:1 ratios simply because that's what they've seen before.
Remember, you can preserve upside potential as long as you have more total long deltas compared to short (each short call represents a maximum of -100 deltas) so if you don't have the capital to buy 200 shares of stock, that's completely fine. We can buy 101 and have upside (albeit in this case very small, simply to prove the point).
The decision cycle is simple: how much capital do we want to collect up front vs how much upside potential do we want? This simple change has significantly increased my return profile over the past 16 years and hopefully something that can help you guys out as well.
Posted by esInvests