when to use and when to avoid covered calls
the best time to sell covered calls is when the underlying security has neutral to optimistic long term prospects with little likelihood of either large gains or large losses this allows the call writer to earn a reliable profit from the premium covered calls are not an optimal strategy if the underlying security has a high chance of large price swings if the price rises higher than expected the call writer would miss out on any profits above the strike price if the price falls the options writer could stand to lose the entire price of the security minus the initial premium example of a covered calllet s say an investor owns shares of a hypothetical company called tsj although the investor likes its long term prospects and its share price they feel the stock will likely trade relatively flat in the shorter term perhaps within a couple of dollars of its current price of 25 if they sell a call option on tsj with a strike price of 27 they earn the premium from the option sale but for the duration of the option cap their upside on the stock to 27 assume the premium they receive for writing a three month call option is 0 75 75 per contract or 100 shares one of two scenarios will play out 