Jim,
My first response to you was a bit terse. I should have elaborated my frustrations with covered calls as a trading mechanism. In general, I would say that covered calls is, by definition, not a day trading technique Covered calls is more of an intermediate time frame investment technique.
I tried selling covered calls for over a year (a la Wade Cook). I was plagued by several problems:
(1) Stocks with the highest premiums (as a percent of stock price) are also the most volatile stocks. So they are the most likely to make large moves either up or down. This is, at best frustrating and at worst very costly. If a stock moves up significantly, you miss out on most of the gain (as you pointed out). Worse, if the stock moves down significantly, you lose money on the position.
(2) You lose a great deal of trading flexibiliy once you enter a covered call position, because in order for you to exit your position, you have to actually spend more money (to buy back the option) before you can sell the stock It is particularly frustrating when a stock moves down significantly</b. It is psychologically devestating (to me anyway) to have to spend money to exit a bad position (it's like a double-edged sword with both edges cutting in to you simultaneously).
For example. You buy 1,000 shares of California Amplifier at 30. Sell the February 30 calls at $2.00 (for an apparent 6%, one month gain. The stock moves down to $28, and your call moves from $2.00 to $1.00. In order for you to exit, you still have to buy back the call. Until you buy back the call, you cannot sell your stock, which may continue its descent.
(3) When a stock moves up, you are forced to watch "from the sidelines" You do not get the benefit of any move beyond the strike price of the option you sold.
For example, you buy AOL at 100, sell the next month 105 call at $8. AOL then moves from 100 to 135. You are forced to watch a 22 point gain slip away (ie, $105 strike price + $8 premium = $113 – that's what you get for your stock. However, the stock rose to $135, so you missed $22 points -- $135 - $113.)
This is even worse if you watch the stock rise up significantly, then retreat below your strike price before the expiration date. (ie, same example, AOL rises to 135, but then falls back to 98 before your expiration date. So ineffect, you lose $29 points rather than $22, because whereas you could have sold the stock for 135, you are now forced to sell it for 98, but you keep your $8 premium (135 - 98 +8 = $29 loss).
(4) There is a tempation to "chase" the stock once you have sold the covered call. In the AOL example, you bought AOL at 100, sold the 105 call for $8. Then AOL moves to $115. You attempt to capture some of the gains of AOL's moves by buying back the 105 call and selling the 120 call. You buy back the 105 call for 16 and sell the 120 for 8. Then the stock moves against you. You lose even more money than you would have had you kept your original 105 position.
Anyway, suffice it to say that I personally don't consider covered calls to be a day trading technique in the least. It is a longer term, position trading technique. The stocks you pick are completely different; your mental approach is completely different. I expect that someone who is good at day trading, probably is not cut out to be a successful covered call writer, and visa-versa.
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