Please tell me my blind spots

Covered calls are a great low-risk way to get started in options. Your basic understanding is correct; you sell the call option and receive the premium in exchange for the obligation to sell the underlying (which you already own, “covering” your call) at the strike price if the buyer wants to excercise the option. You get guaranteed income now, and the only risk is that you miss out on gains in the underlying by being forced to sell your shares below market.

If you buy an item for $10 and able to sell it for $12 plus an extra fee along with it. Are you happy?

Investing is fun. One of the keys to success is investing in vehicles that match your personality. That is, if you rather do something fast you want short-term Trading. If you want to take your time you do long-term Trading. If there’s a mismatch between your personality and the personality of the investment vehicle you’ve chosen that could lead to disaster. Options are great because they help you to dial in the personality that you’re looking for. Many people understand some of the basics and assume that’s why options were invented. But in reality there are many different ways to use options for both short-term and long-term Trading. The best way to understand them is to Crunch the numbers paper trading. If you are going to buy stock and sell covered calls then in your paper trading you shouldn’t select one call to sell but select three or four different options and see what would happen at expiration. How much would you make if you sold a weekly call against the stock? A 3-month call against the stock? A strike price only two strikes away from your current price? A strike price six strikes away from your current price? This will help you to understand options, the personality of the trade that you’re creating and most importantly what percentage of profit you can possibly make on that trade. As you do this number crunching exercise you need to think a lot about which underlying stock do you want? One that has a large dividend but does not move very much or one that doesn’t pay a dividend but moves quite a bit in both directions. Once you start to get a better feel for what kind of personality you want your Investments to take on then you will have a better idea how to maximize your profits. In addition, this is a futile exercise if you don’t also take into account your tax consequences. You have to crunch the numbers including your tax liabilities. Short-term gaines, long-term gains short-term losses. As for me, I would prefer to buy a stock that paid me a dividend and then the next day it closed a nickel over the price of the option I sold against it and the stock is called away. If the stock closed 10 points above where I sold my option I’d be disappointed because I probably would have made more money just holding on to the stock. But if I could collect the dividend plus the stock option write price and the capital gains between my purchase price of the stock and my option price, which is theoretically the maximum gain I could make on that trade, and then do that everyday with a different stock I would be making much more money than I would be if I bought stock and hoped that the stock did not rise past the sold option strike price. It’s probably very unlikely anyone could do that everyday but if I could do it every week that would be good. But again it depends upon what kind of trading fits your personality. Good luck, crunch the numbers, understand what kind of trade you’re getting into on the upside in the downside if you do that you have a higher chance of being a profitable Trader.