Blooey Trader Feedback: 0 Junior Analyst
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Been reading up on options, but still have a few questions. (I could have sworn that someone had started a thread about an options tutorial about three or four months ago where someone talked about selling calls, but I couldn’t find it.)

My question is, is it possible to sell covered calls and make a living at it?

Say you’ve got 100k to invest. You buy some stocks with it, stocks you plan to hold for a long time. Say you buy XYZ @ $100 x 1000 shares. (Of course, it would be wiser to diversify, but for simplicity’s sake, I’m only using one stock. This also assumes that you’re fairly confident that $100 is a very good price for the stock.)

I don’t know what $110 strike options would go for, but say they are $5. Now you get $5000 for selling the calls and don’t have to sell your shares unless it hits $115. If it does, great, you sell your shares for $110, and you just made $15000 for the month! If not, you get a gain of 5% and keep your shares. Wash, rinse, repeat, right? (Let’s assume I’m happy with $5000 a month as income. LOL)

Now initially, I was thinking this is a pretty cool idea. However, two big questions occured to me.

One, is it always possible to sell the calls you write?

Two, what if the stock tanks the next month to $75? Sure, I made $5000 by selling the calls, but I also had to hold my shares till the third Friday of the following month, watching it all tank. I lost $25000 on my stock and gained $5000 with the calls for an overall loss of $20000. However, even if you intend to hold the stock for 10 years, the problem becomes that you can’t really sell calls on this stock anymore right?

I mean, you could. but if you sold 90calls, and they got exercised, you’d have to sell your shares for a loss. If you wanted to avoid selling your shares for a loss, then you could sell 110calls again, but then, you wouldn’t get $5 for them, would you?

Is there something I’m missing, or is this all about right? Is there a way to hold stock longterm and ensure yourself an income off of it with options somehow? Is there another way of playing options so that you maybe make a bit less but protect yourself?