New to the concept of CC's.
Let's say I want to buy 100 shares of stock XYZ for $20/share; and I'm buying these shares only for the purpose of selling covered calls. So I do not want to own the stock for the long term.
Then let's say I sold a cc at a strike price of $21/share, and I received a $30 premium for it. My question is what should one do if stock XYZ price falls below the $20/share that I bought my 100 shares for, and the price is now $18/share? Now the buyer of my call option shouldn't exercise their option at $21 when they can get the stock at $18, so I should be fine there. But although I wouldn't get assigned, I would still show a paper loss of $200 on the stock, plus the gain of $30 from the premium earlier, which still means a net loss of -$170.
So is there a strategy or way to still come out profitable when you sell a cc but the underlying stock price goes below your average cost of owning the stock leading to a net loss on the overall play, especially if you don't want to hold the stock long-term and wait for the stock to recover?
I appreciate any input from those who have more experience with covered calls. Thank you in advance.
Posted by agent_huey
8 Comments
“So is there a strategy or way to *still come out profitable* when you sell a cc but the underlying stock price goes below your average cost of owning the stock *leading to a net loss on the overall play*, especially if you don’t want to hold the stock long-term and wait for the stock to recover?” [emphasis added]
Do some reading on “revenge trading”. Yes, we all hate to acknowledge our losers, but they don’t care; they’re still losers. If it’s a loser, and you don’t think it will turn into a winner soon, take your loss and move on. The only thing that turns losers into winners is time, and that only work part of the time; some of the time, they turn into even bigger losers.
You should only trade CCs on stocks you have researched and are willing to hold for a time if the price drops. This does not mean a long term hold, but for weeks or a month of more.
A high quality stock may drop but will also usually move back up in a reasonable time.
There are a few techniques that may help.
The first is to lower the net stock cost before buying shares by selling puts to collect premiums on stocks you have a neutral or bullish sentiment on and are willing to hold for a while if needed.
If the puts go ATM then they can be rolled to collect more credits, and which can lower the net stock cost by a fair amount in most cases. Instead of $20 as the stock cost, the premiums collected can see this drop to a net stock cost of $19 and possibly even lower. This gives some room for the stock to go down and not lose money right away.
Some may sell more OTM puts which can both bring in more premiums to keep lowering the net stock cost (NSC), but also reduce the NSC by averaging down if more shares are assigned. This requires having more capital to buy the shares and ensure the risk of any stock is not too big for the account.
Selling CCs can also bring in more premium to keep lowering the net stock cost. Over time the cost can be lowered by enough so that it may still be possible to close with either a profit, no loss or a minimal loss. Dividends may also be collected to help lower the NSC.
Using this “profit manufacturing” process and given enough time and patience most good quality stocks can recover from a stock drop, but it is not always possible. The credits collected can still reduce the amount of the loss and working the process can be very helpful.
I posted my wheel strategy some time ago and this can have a high win rate due to being able to have the shares called away if assigned – [The Wheel (aka Triple Income) Strategy Explained : r/options (reddit.com)](https://www.reddit.com/r/options/comments/a36k4j/the_wheel_aka_triple_income_strategy_explained/)
If you don’t want to own the stock, why not sell CSP and wheel the thing?
Also, if your cost basis is $20 and the stock goes to $18, look to sell further out in time for $20 strikes.
You CAN sell CCs below your cost basis but that requires some some extra watching. I am lazy and don’t wanna worry about it.
You should also be tracking your profits from premiums to get your adjusted cost basis which should go to $0.00 if you sell CCs long enough.
My GME shares (yes I know) have paid for themselves at this point, several times over.
If you do not want the shares, then why buy them. CC are BEST if you have a Portfolio of stocks, and while waiting for the stocks (which you LIKE) to go up you earn some income.
If you just want to Sell Options with a 70% win rate then Sell Options in a Margin account, with a Delta of under 30. You do need the Buying Power or Margin but there is NO INTEREST on that , big Misconception here on Reddit. Also you will find better stocks to play by using not buying stocks . You may find many $50 stocks that give you a better play.
Say you did Uber, at 25 delta , for 19Jul about $1.10 70 strike and BP of $800. Just close the damn option Win or Lose by the week before expiration.
I only buy stocks I like, whether the CC premium is good or not. When zI buy a stock and sell the CC against it, I have effectively received a discount on those shares. I only accept a strike price I’m willing to accept for an outright sale of those shares, so if the share price goes up and the shares are assigned, I got to have my cake(CC premium) and eat it too (acceptable share price). It’s a maximum win scenario and I’ll take it with a smile every time! About half the time I end up buying those shares back for less than the price I was forced to sell the for. When that happens, it’s a triple win. I love CC’s.
just sell another cc
Continue selling ccs. Once it expires, sell another, if it goes up close to the strike, exit the position and sell it again, if it drops, wait for it to expire and sell again. You may not want the stock long term, but are you really buying 100 shares just to do a single cc?
Watch the video:
https://youtu.be/U8gFC00kZ58?si=4Wf9pfj4b2HDsiI1
There are 2 main strategies for selling premium with no intention of owning the stock.
1. Credit spreads. The long put protects the short one so you don’t have to take assignment.
2. Selling cash-secured puts and rolling them down and out if they’re threatened. Unless the stock utterly tanks you can usually keep rolling until the price recovers and you’re out of the trade.
CSPs usually have a higher probability but may be less capital efficient. On the other hand spreads allow you to trade markets even if you don’t have enough money to hold the underlying.
If you’re OK with your profit taking longer than originally planned then it’s rare to have to bank a realized loss with CSPs and CCs. But you should still always weigh the opportunity cost.