Do Covered Calls Limit Your Profits?

Writing covered calls is a very popular strategy in the stock market. And it can be both a great cash flow producer and a not so great means of missing a profit.

When you sell a call on a stock you already own what you are doing is giving someone else the right to buy a given stock at a given strike price on or before a given date. For this right you get money up front.

For example say you own 100 shares of XYZ stock trading at $28. You can sell the front month $30 call for $3 but you would receive the obligation of getting called out of your stock at $30 should the buyer choose to.

The downside to this approach is if the stock goes up really far really fast. If XYZ goes up to $40 within the next couple of weeks you would be forced to sell the stock at $30, missing the majority of the move. You would have made $3 from the option and $2 from the stock but missed the $12 by simply selling the option.

So in a sense it can limit your gains. But that does not make it a bad strategy, far from it. What are the odds of the stock making such a huge gain? It can happen, but it definitely is not the norm.

So instead of worrying about their missed profits, covered call sellers rely more on consistence. Instead of trying to get the huge home runs you can be just as profitable by getting smaller more consistent gains.

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