Why Covered Call writing Can be Frustrating

In a previous post I talked about a covered call position I had taken.  Friday’s movements in the price of the stock and the resultant changes in the price of the call reminded me of why I usually don’t write covered calls.

As I stated previously, I wrote May calls on some shares of BJ’s Restaurants that I own with a strike price of $35.  This gives the person who bought the calls the right to buy those shares from me for $35 per share between now and the third Saturday in May.  In exchange, I was paid $1.30 per share, which came out to be about $1.10 per share after paying brokerage commissions.

At first things worked really well.  The options went up in price on the day I made the trade, so that the price of the options went to $1.90 at one point, meaning I could have made about 50% more if I had timed it just right.  The next day though the price of the stock fell and the price of the options went down bellow $1.00 per share.  The stock continued to drop in price, down to about $33.32 per share, at which point the price of the options fell to about $0.40 per share.

Here’s where things get tricky.  I thought about buying the options back, which probably would have cost me something like $0.50 per share, and pocketing a $0.60 per share profit.  I could then wait for the stock price to increase again and write more calls if I wanted.  I could also just stay where I was, hope that the stock price stays low through the end of week after next, and then keep the whole $1.10 per share.  Buying the options back would expose me to a little larger loss if the stock price continued to fall as well.

I decided to hold the options and wait for them to expire.  Today, sure enough, the stock shot back above $35 per share and the options went up to about $0.70 per option.  (Note that the closer we get to expiration, the lower the price of the options will be for the same share price, which works in my favor).  If the stock stays above $35 per share for the next couple of weeks I’ll sell the shares for $35 per share.  I’d prefer to keep the shares, but it wouldn’t be a great loss if they were sold either since I’d make a decent profit.

This is one reason I don’t write covered calls often despite the potential to make some good returns.  It is just so much easier to buy great stocks and hold onto them for a long period of time.  You don’t need to react quickly or try to second guess what the market will do.  It is much easier and less stressful.

Well,I guess I’ll see what happens….

Please contact me via vtsioriginal@yahoo.com or leave a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


  1. This article is actually a confirmation of the ADVANTAGES of cc writing. You generated a 3%, 1-month return (more if you purchase below $35) and had the oppotunity to sell at the price you agreed to when you entered the trade. It doesn’t get any better than that. In addition, if you decided to keep the shares when the stock price moved above the $35 strike, you could “roll” the option and generate additional proft from time value credit.

    The key here is to focus in on your goals and have appropriate management techniques in place to mitigate losses or enhance gains.

    Congrats on a nice trade!

    Alan Ellman

    • You’re right that things are going well. My point though is that unlike long term buying and holding – the main investing I do – writing covered calls can require you make some guesses. At times you need to guess where the stock will go next, meaning you have a 50-50 chance instead of the better odds you have with long term investing.

      You could also get into trouble. For example, if you try to keep the shares by writing longer term options or writing at higher strike prices, you could get into a situation where you end up putting more money into the deal then you get from selling the options. You could also lose a lot due to inefficiencies in swapping contracts – you lose the spread on both sides and could end up in a bad place if the options move while you are swapping one for another.

      You’re absolutely right that you need to have clear goals and a plan before you get started to keep this from happening. In my case I’ll probably just sell the shares if the price stays high.

      Thanks for reading and especially for the great comments.

      • I respect your opinion but want to offer responses to your concerns:

        1- If the writer of the calls uses sound (non-emotional) fundamental, technical and common sense parameters in their stock and strike selection, we are not making “guesses” (although there is risk) and the chances of success is well above 50%.

        2- I agree that writing farther out-of-the-money strikes is not a good idea. The reasons for this are that you generate a greater annualized return using 1-month options and you MUST avoid earnings reports when using this strategy.

        3- Rolling (swapping) options should be executed at the same time, one after the other. We can also “negotiate” better prices by placing limit orders, a subject I discuss in my books and DVDs.


      • I’m not implying that the chances of success, where success is defined by making a profit on any given trade, are 50-50. I’m saying that in deciding to buy the call back or hold tight on any given day where the call is in the money is 50-50. For example, if I were to buy the May 35 calls on BJ’s back today, I would pay $95 per call. If the stock goes up tomorrow, that would be the right choice. If it goes down, I would have been better off just sitting pat. The chances of it going either way tomorrow are 50-50. You’re absolutely right that using sound, non-emotional parameters is key. The trouble is when the stock is shooting up and your short position on your calls is growing bigger everyday it is easy to get emotional. At least time is on your side though, unlike the person who bought the calls.

        I would guess that the price of calls is such that the chances are the writer will make more than they would have if they would have by holding the stock, otherwise the price would be too low. With the low volumes of options compared to stocks, however, I’m guessing that isn’t always the case. It also seems like the options trader gets “roughed up” more by the specialist than the stock buyer does by the market maker since the bid/ask spreads tend to be a lot bigger.

        In “placing limit orders,” are you referring to setting limits on the spread for swapping the calls or each side of the swap?

      • As the stock price rises and the strike moves deeper in-the-money, there is no need to close the short position as you have maxed your cc trade UNLESS the time value of the premium approaches zero and the entire positiion can be closed at no cost to the cc writer. In this case, I use the cash from the stock sale to enter a new position and generate a 2nd income stream in the same month with the same cash…I love this strategy.

        Retail investors have an advantage over institutional investors by setting limit orders and leveraging the SEC’s “Show or Fill Rule”


      • By “use the cash from the stock sale to enter a new position” do you mean writing a collateralized put? Also, what’s the “show or fill rule?”

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