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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Uncle Frank who wrote (4685)12/21/2006 8:05:22 PM
From: TimF  Read Replies (1) of 5205
 
I understand time value decay of options. But that really isn't the same thing as a house advantage. That's just an element of why having large positions of options is risky (an idea that I've already agreed with, just in case you thought I didn't).

Any investment has risks. Some more than others, but the house advantage in Vegas isn't that some payouts are unlikely, its that the house consistently has to pay out less than it takes in. If you have a one in a billion chance of a dollar turning in to a billion dollars you have in a sense a very risky investment (even if you are only losing a dollar), but you aren't fighting a house advantage.

Covered calls are less risky because the risks of two relatively risky investments (long stock, and short a call) are mostly in opposite directions. And the riskier investment (short the call) is completely covered. With out of the money options you can even get a profit from both (stock goes up, but call still expires worthless). Of course you have a different type of risk - That of still having most of your investment at risk (you can lose 100% of the initial stock price, minus the premium) while temporarily cutting off your upside (so the stock could zoom and you might miss most of the move). Still if often makes sense. I'd use the strategy more often if I was allowed to use it against my stock holdings in my 401K.
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