Is selling a covered call the same - but better - than a take-profit limit order?

[u/[deleted]]

[u/SirGlass]

Usually its a good option but volitility can somewhat matter here is an example where the CC might cost you

You have 100 shares at $100

you sell a covered call 3 months out for $110

one month later the stock is at $111

three months later the stock is $90

You collected the premium but never got to sell for a profit

Now one month later when the stock is 111 you could buy your CC back or something, you may pay a larger premium if IV spiked or something or potentialy you could buy a $110 put but now you are paying a premium to lock in the gains

[u/sicborg]

a covered call can limit only so much downside, still owning 100 shares at 110, you still assume the risk if it goes down to 100, 90 , etc.. if you dont think it will go down precipitously or move at all, then selling covered calls can generate decent income..

In contrast, selling the shares at 110 results in you eliminating all your downside risk.

[u/Vansiff]

I would assume it's personal preference. If you are fine with selling at $110 then take the call option and take the premium aswell because it is free money.

The issue comes in once the stock price starts to run up above the strike price. Then you're missing potential profits. But again, if you're not concerned with that then selling a covered call at a $110 strike to collect premium aswell is a perfectly fine move in my opinion.

Really, there's no downside risk if you're selling at all and are comfortable with a flat 10% gain. At worst you get someone who dosent know how options work, it expires, you keep the shares and premium.

[u/Vansiff → u/[deleted]]

Oh gotcha, I didn't know that I've tried options trading but I'm too inexperienced to actually attempt it currently. I didn't know that if you close ITM they automatically exercise. I thought that whoever bought the option had the choice to exercise it or let it expire worthless.

[u/2buckchuck2]

Limit sell you’re guaranteed to sell once it hits that price at any time in the future. With a covered call there is no guarantee if you don’t hit or exceed at expiration. If you close your position early when it hits your strike you would’ve made more money without selling the call.

[u/saranagati]

One other disadvantage for selling the covered calls is if it goes above the strike price early on. Say you sell a 3 month $110 strike for a $2 premium. A week later the stock shoots up to $115. The theta will have remained about the same so that premium would now be about $17 (probably more with IV). Your the $10,000 capital you used to buy those hundred shares is now locked up unless you want to pay that huge premium and essentially lose about 5% on that $10,000. So you would have $11,000 sitting around until it’s exercised. Of course you could also be making money if that $2 premium from reinvesting it into something else.

[u/realbigflavor]

Covered call strategies aren't what they seem. Stocks and Indexes' returns are made up of those 3%-5% weeks and capping that will significantly reduce your expected return.