Is it worth doing covered calls?
It depends far more on the person than on the strategy. Covered calls sit at the lower-risk end of the options spectrum, but whether they are worth doing turns on someone's risk profile, what they expect their capital to do, and the lifestyle they want around it.
The Blu Sky Factory answer
Taught by Derek Whitaker
It's probably the wrong question. The question should probably be more focused on someone's risk profile and lifestyle. Covered calls are generally considered fairly low risk by trading platforms when compared to other options strategies, but risk is a subjective perception. Every trade and strategy has an element of risk and smart traders and investors understand this. In fact, the more someone knows about the strategy and how to mitigate it, significantly reduces the risk. It's when things don't go according to plan that an experienced trader rises to the occasion defending the capital in their account as opposed to the novice who hasn't thought through an exit and drawn up their trading guidelines.
Think of it like a pilot. A pilot sits through multiple tests in a simulator to see how they would handle emergency situations. In the moment seconds matter. An experienced trader will have a well devised mitigation plan for when things don't go according to plan.
Other traders may look at covered calls and think they can achieve better returns utilizing other strategies.
From a lifestyle perspective most covered call traders focus on the US markets because of the liquidity in that market. Being able to watch that market may come down to a lifestyle decision based on what timezone they are based in.
What a covered call trades is straightforward: the holder keeps the premium and gives up the gain above the strike. The income is known in advance, and the ceiling is what pays for it.
That makes the structure easy to describe and harder to judge, because whether the trade-off is a good one depends on what the holder wanted from those shares in the first place. Someone seeking steady cash flow from a position they intend to keep is answering a different question from someone hoping the stock runs.
Preparation matters more than the strategy label. A defined exit, written before the position is opened, is what separates a manageable outcome from an expensive one when a stock moves further or faster than expected — and it is the part least likely to be in place when it is first needed.
Liquidity is the practical constraint behind the lifestyle question. Covered call traders tend to work US markets because the options there are liquid enough to enter and exit at sensible prices, which for anyone based in Australia is a decision about which hours they are willing to keep.
- ◆Covered calls sit at the lower-risk end of the options spectrum — but risk is judged by the person carrying it.
- ◆The premium is known in advance; the capped upside above the strike is what pays for it.
- ◆A written exit, decided before entry, is what makes an adverse move manageable.
- ◆Liquidity pushes most covered call trading to US markets, which is a question about hours as much as strategy.
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