Well Jim, if you would slow down a little, I think you can see the risk yourself. I imagine the risk is related to how agressive you are in writing those covered call options. For example, you can lose some of the profit you made on the stock's appreciation in value. Lets say you purchased a stock at 20 that rose to 25. At 25, instead of selling the stock, you wrote a covered call for 23 because of the premium available on that option. Instead of dropping, the stock rose in value and you were called out of your stock. Now, has the premium covered you loss on the 3 point you did not collect on the stock's appreciation?
Or lets make this even more interesting. Lets say the stock in one day dropped like a rock. This is entirely possible since there has been well publicised stocks that dropped quickly after their earnings announcement even though the company exceeded street estimates. To compound this picture, since most of us work at an office for a living, you did not hear about this until you arrived home. Now, you are stuck owning a stock that sells for under the price you originally paid for it. Will the income that you derived from the option write cover losses?? Will you end up selling the stock at a loss?? Remember, what is being proposed here is buying on margin. This will greatly magnify your losses in the stock you are invested in with this type of situation.
The moral of this story is that any time you take an active stake in a stock, you are always placing yourself at risk. The greater volitility of the stock, the greater the risk. The more you have purchased stock on margin, the greater the compounded risk. It is just that simple, Jim.
Any more questions?? ;) |
