<<you're just "churning" yourself writing deep in the moneys.>>
It's not quite THAT illogical. I don't do it because I don't play options at all. Don't like to play against a house percentage that comes with buying them, and don't like the huge risk of writing them. However, a deep-money covered call can make money. It's effectively a straddle but entirely to the upside. That is, it wins if the issue rises by less than the strike price. It also buffers the downside a little if you're going to hold the issue long -- it gains a little on a decline, like any short call.
There are two costs. First, you lose the upside past the strike. For me, this is a poor use of money, since my #1 aim in investing is to be there if an issue hits a 2-bagger or better. This is especially true in volatile sectors like semi equipment -- I assume we've all hit 300% or better gains in the past year. It's the sweetest thing about being long -- no limit on the upside.
Second cost is the house percentage. With trading fees at $8-$25 per trade, no matter how large, the transaction costs are pretty much negligible for security transactions. For options trading, the transaction cost is still a factor. To me, given the impossibility of accurately predicting future stock prices, covered call sales are a suckers' bet, like playing the side bets in a craps game. You give up a percentage because of transaction costs and, in the long run, it costs you money.
But it's still better than simply churning -- if you pick the stock price right, you can hit a winner. |
