say X puts their entire portfolio into intel calls and Y puts their entire portfolio into long intel stock and writes calls against their stock. The next day, friendly aliens land on earth and give out 1000000 Mhz chips for free, sending intel stock to half its original value. Both X and Y have sustained massive losses, but X's portfolio is now worth zero, while Y's is still worth half its original value, plus whatever premium he got for the puts.
I understand your point, but I feel like you're comparing apples with elephants. Sure, you have more risk if you put your whole portfolio in long options, but you have much more potential for reward. By putting your entire portfolio in long calls, you have tremendous leverage compared with the covered calls. You would have lost everything on a down move, but if Intel invents the 1000000 Mhz chip tomorrow, you kill'em with you're call position. The covered calls make X% and that's it. For a more realistic comparison, look at the difference in risk between one covered call and one call. Or for that matter, buying one call versus selling one put. With covered call writing, you pledge more collateral to begin with. Just because you get to keep some of it does not mean it has less risk. Do not think I am trying to discourage you from writing covered calls. I just want you to understand the risk associated with this strategy. There is a saying on the option's floor: don't confuse brains with a bull market. |
