Wednesday, June 20, 2007

Why Covered Calls?

If you ask any experienced options trader what he/she thinks of covered calls you're likely to hear something like this, "Why would anyone want to trade covered calls, since they're synthetically the same as naked puts, with unlimited risk and limited reward, when there's a myriad of other options strategies with much better risk/reward profiles."

It was opinions like those that led me to dismiss covered calls in the beginning and spend 2 years learning and trading other options strategies, without success. When I finally took a real good look at covered calls...well you know the rest.

So, my response to that question now is, maybe because it's a strategy that they're comfortable with, and successful at. Success has more to do with the individual than the strategy. Some people are just not comfortable trading pure options strategies, especially if they come from a stock buy & hold background. For them, covered calls is a small step, whereas complex options strategies is a giant leap. So, just because an experienced options trader would probably never touch a covered call, doesn't mean that everyone should dismiss the strategy.

An options trader related a story of how he's tried to get his wife to learn options, but every time he tries to get her to understand the synthetic relationships between stocks and options her eyes start to glaze over. However, she's comfortable with covered calls and is successful at it. It's hard to argue with that.

I can definitely relate to that story. Options strategies can make your head spin. That’s why I like the simplicity of covered calls. It's a strategy I'm comfortable with and successful at, and that's what you want in a strategy. Whatever works works, and people need to find what works for them, whether it's covered calls or any other strategy.