If you wrote calls and the stock goes up, they are soon so far in the money that there is no premium, and you can buy them back and write higher calls for a more interesting premium.
How exactly did you lose on this?
It was never a loss, just opportunity cost. If the stock went up it usually went parabolic. Chasing the call to cover it would be futile in many cases, I would just allow the stock to be taken away.
For example, let us say that you have a stock and you have written a call against it that is slightly OTM. The stock is volatile, hence the volatility is present in the premium of the option; else you would not be writing it necessarily.
Over a few days the stock has a 37% up move. Say $42 to $58. The volatility remains present to some extent in the option...the play may be to tie up capital at some risk to buy in more stock. Else, risk that the equity halts and the volatility dies off. Either way, there is a $16 opportunity cost minimum. Now, of course, some of that is re-couped through the sale of the call.
However, in a bullish phase, future gains based on further movement in the underlying aren't happening. In essence, then, the practice of buying stock and writing calls against the underlying is a scalp play. It ties up equity for small potential gain with greater downside risk.
I know many who do this, I do not because I determined that for me it appears to be a weak trade from a money management standpoint during a bull phase.
Sideways market yes, trending market no. There are times when it makes sense and times when it may not be.
It is not that there is loss of money. It's a short term trading technique and in my case I decided I was/am a longer term trader in terms of stock equity issues. |
