It has risks. In 2008 when the markets collapsed I was forced to hold stock due to a covered call contract. By the time the covered call expired the stock had lost 50% of its value.
I got lucky and was able to make my money back buying into the bounce but that had nothing to do with the covered call strategy. Sooner or later you will get trapped in a bad trade and be forced to either buy back the covered call at a large loss or hold a sinking stock far longer than you want to...and that is the flaw in the strategy.
If you use stocks that have high dividend payouts you can sometimes offset the losses over time by just holding the stock until divs and a bounce get it back into the money. That requires a lot of patience.
So on the day before the stock goes ex-dividend paying a big fat dividend, a guy holding a deep ITM American option will:
a) Wait another few days to exercise his option because he wants you to have the dividend.
b) Exercise the option and take the dividend for himself.
Did you miss that the prices you gave are for American options?
John seems to think scenario B is a bad thing, but I think it's great because it means you get all the time value of the option in a shorter time than if you hold to expiration.
This is a covered call income strategy that I have recently thought more and more about, my question is, is it realistic/possible?
(Assume you have $94,689) Assume the date is 4/1/14 and AT&T has a ex div date of 4/8/14
Step 1: Buy 2700 shares of AT&T for 35.07)
Step 2: Sell 27 covered calls that expire 4/11/14 of AT&T with a strike of $33.50 for $1.50 (The current bid ask spread is 1.50-1.65 or something similar)
Step 3. Pray AT&T doesnt fall below 33.50 before 4/11
Step 4. Ex dividend takes place and you are accounted to receive .46 per share (.46=AT&T quarterly payout)
Step 5. 4/11/14 comes and the owner of the calls you sold takes your shares and pays you $33.50 per (assuming AT&T is above $33.50)
Step 6. Wait for payout of dividend
Step 7: Repeat
The cash transactions would be something like this
Initial investment $94689+Commission
Covered Calls= $4050 (27X150)
Expiration date= $90450
Current total=$94500...this equals to a $189 loss off of initial investment
Div Payout=$1242 (.46X2700)...this equates to a $1053 gain off of initial investment
If an investor was able to do this weekly or biweekly it would beat the market by a significant amount. The only issue i could foresee is selling a large number of the covered calls at a in the money strike
