The good thing is, people have studied this. Because your argument is certainly plausible. What you leave off is that while you may "miss out" on upside, you also bank credit every month that you reinvest and compound.
I called making money in stocks a 50/50 bet, but it's not. It's biased toward the upside, a premium you're given to invest instead of lending (bonds). I've seen it calculated from 3-5%. So lets call the probability of profiting when you buy a share of stock 53%.
So let's talk about this study: * It's not part of the study but, we're in a 5 year bull market. So if your point about missing out on upside is true, it would certainly apply in this market.
* At the beginning of the year, purchase 100 shares of every company in the Dow * Each month sell the nearest OTM call, banking the credit received * Compare P&L with a uncovered long position.
By selling covered calls you reduced your basis by an average of 8% and increased your Probability of Profit to 73%.
Here is a link to another website that has a write-up about the study. I emailed the research team at TastyTrade to get a link to the study itself. I've seen it on their website but can't find it now. http://probabilitycapitalgroup.com/market-studies/using-cost...
And of course the wonderful thing is anybody curious can backtest this themselves. There's a lot of ways to do it, but the trading platform Think or Swim is free.
I'm not advocating what I don't understand, or what I don't have experience with personally. Honestly, i don't buy long stock very much, I prefer options strategies, but for example I'm long AAPL stock, and I've sold the $110 covered calls.
Addendum: I understand the resistance. Most peoples first (and only) experience with options is buying an OTM call or put. They almost always lose their money, think 'wow what a racket' and swear it off. Moreover a general distrust of market makers, hft, etc, and people stick with the status quo. But the reason I love trading with options is because I get to pick my own probability of profit.
You are right on one thing, though: The style of trading I do does not enjoy or rely on the "big win" of holding a big position that goes up huge. My style of trading is: 50 small positions in uncorrelated underlyings that give me a number of individual occurrences to let probabilities work in my favor -- to eliminate statistical variance.
Edit: To be totally clear, I do not advocate buying OTM calls and puts. I'm talking about taking the other side of that trade.
No, you're just betting that it doesn't go past your short strike, which could be few percent above the current price.
The strategy is simple: Most long options expire worthless. Selling something that will soon be worthless is not a bad business.
I would imagine you would agree with my statement that buying OTM calls and puts is bad investment advice and likely to lose money?
Yes?
Ok, then why are you so against taking the OTHER side of that trade?
Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market.
Its really the worst of all possible worlds...
you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock.
All you're doing is collecting pennies infront of the steam roller that is the market.
The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down.
The reason people do it is that the market can be calm for months and then move.
So you get:
small income in month 1
small income in month 2
then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well.
Or put in laymans terms, the down side far outweighs the upside.
Also be careful here:
> Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.
Please note this is just wrong.
There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move.
My whole point is that selling covered calls does tilt the odds, just not in your favour:(