John Jagerson

Why Trade Covered Calls?

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Covered calls, when applied consistently over the long term, deliver significantly lower account volatility without decreasing profit potential.

In fact, long-term covered call indexes show that account volatility is reduced and returns are increased. A covered call is one of the very few ways to accomplish these two objectives at the same time, and is a gateway to learning more about using options as an investor.

As we discussed in the previous articles (see part 1 on writing options and part 2 on selling covered calls options), during short-term rallies a covered call can sometimes cap profit potential on the underlying stock.

This happens because you can only make the premium you were paid when you sold the option plus the strike price for the stock itself. If the stock is running away to the upside, you may have made more just holding the stock.

However, if the market breaks to the downside, the option will expire worthless and you get to keep the entire premium because you will not have to sell the stock at expiration.