The Downside of Covered Calls?
Chances are your first trade with options was a covered call, which is a strategy where you purchase stock and then sell calls against it. For example, you may buy 300 shares of stock for $45 and then sell (or “write”) 3 $50 calls against it. In doing so, you have given someone else the call buyer the right to purchase your stock for the strike price. This is called a “covered” position because no matter how high the stock may run, you will always be able to deliver the shares to the long position if they should decide to exercise the call. The strategy is fairly easy to understand and is also allowed in IRA accounts, which are a couple of reasons the strategy is so popular. However, one of the drawbacks to the covered call is that it often provides very little downside protection if the stock should fall. The risk of the covered call is that the stock falls. It continues to lose money as long as the stock falls below the breakeven point. In fact, the strategy of naked put writing has
