We discuss about the awesome opportunities that are available in a Bear Market
Why did you say that selling covered calls in a bear market could end up with you going broke?
I was thinking that if we had a upside set up on the weekly chart, we could just wait for the Daily/233 to roll over or stall to sell the call ( and I would be rich beyond belief 😀 )
Hi Mike, Imagine buying a stock at $100.
Now, sell a call, let’s say with a strike price of 100…perhaps you collect $3 in call premium.
Now, the stock drops in value, let’s say it falls to $90 – a 10% drop in a bear market is NOT a stretch.
You close the covered call….pocketing most if not all of the $3.
So, you’ve lost $10 on your stock, but gained $3 on the covered call….so overall you’re down $7 or 7%
Now the stock goes sideways a bit…If you sell a $100 call, you will collect only pennies in premium…
If you sell a $90 call, you’ll collect a few $$ but you run the risk of getting called out if price goes north of 90.
So, you sell a 90 call….let’s says that you collect $2.99 (so that I can differentiate between the two sales);
The stock drops…it drops another $10 to $80.
You close the covered call….pocketing most if not all of the $2.99.
So, now you’ve lost $20 on your stock, but gained $5.99 on the covered call….so overall you’re down $14 or 14%
While the covered call is making your stock loss a bit less painful, you are still sitting on a large loss.
The message/lesson: the stock falls faster than the call. So, what you earn in call premium does not keep up
with what you lose in stock value.
Duzzat make sense?
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