Worst-Case Scenarios Call for Covered Calls
Fear of losing money sidelines too many would-be investors. They’re afraid they sell at the bottom.
So, what would be the worst-case scenario if someone bought at the peak and then sold at the subsequent worst time? How can a covered call—perhaps the most boring of all options strategies—improve performance?
“Worst-case scenarios,” below, shows the results of investing in the S&P 500 (SPY) via a popular exchange-traded fund, compared against buying SPY and selling a covered call $5 above the market.
In nearly every year, the covered call significantly reduces the loss. That’s because the money received on the call helps reduce the losses. Right now, the call option in SPY that is roughly 30 days away will help reduce the downside by approximately 1.3%. Do that monthly to reduce downside risk.
What are some covered call ideas? See the table called “Covering up,” below.
Michael Rechenthin, Ph.D., (aka “Dr. Data”) is head of research and data science at tastytrade. Sign up for free cherry picks and market insights at info.tastytrade.com/cherry-picks
