Covered call curse or bad behaviour?

The principle and concept behind a covered call is clear to me. In theory it looks simple, so putting in in practice should be easy. Or so I thought…

After a good lessons learned with my RDSA covered call, I became more cautious. I almost stopped selling them, as I could not get a good premium for the strike I wanted.

Learning more about covered calls and my emotions

The real first call I sold again was a buy/sell (buy the underlying stock and sell the call) on GDX. My favourite gold mine tracker. The result should have made me happy. About 10pct profit in 31 days… Not too bad. I should not complain. The only thing, GDX went up another 40 pct after that. And that feels bad. It should not.

I discovered that rolling a deep in the money covered call  to a higher strike is a difficult thing to do. I could not achieve to roll out and up for a credit. I looked at it the week before expiration… I did not find a roll that pleased me.

I decided to review my strategy: As soon as the strike would be breached, I would roll up and out the calls. This way, I hoped to collect some more premium and increase the value I would get for the stock. Let’s see how this goes in practice. I also needed to spend more time on thinking if I would be willing to sell at that price.

The KMI test case

BoF2009-231The initial reasons to sell were ok. I could lock in about 12 pct profit and that seemed fair to me. I sold 2 calls, some time apart. Soon after,  I had a first possibility to test my strategy: With the surge of the oil price in February and Warren Buffet stepping in, KMI went up a lot. My strikes were breached and I decided to roll.


After rolling both calls (The first one from 17,5 to 19 and the second one from 19 to 21), I now look at potentially 350 USD more profit, but I also need to wait 100 days longer. A lot can happen in these 100 days. The stock can go back to lower levels, or it can go sky high again. I either case, I will be doubting. Doubting on the missed profit, doubting on not selling with 12 pct profit.



IMG_8475This is a good indication I still need to work on my trading attitude. I need to be happy with my plan and stick to my plan. Be more mechanical in the execution. It seems to be hard when selling things I own. This is actually one of the bad behaviors in finance. It is good to know I have this problem. I discover this rather soon in my option career.

In the mean time, I might have the same issue with some of my RDSA stock and a covered call I sold. I changed my mind and no longer want to sell the stock. I already figured out what to do: Roll to capture the remaining 3 dividend payments this year. If all stays the same, this should bring me a 4pct return on my final sales price. On top of that, there will be some 15pct appreciation…

Update early April: I managed to buy back the RDSA option for a small profit of 19 EUR. It is not a lot, but all these small amounts add up. Next to that, I am now freed from my worries. I agreed to only sell options again if I can get a decent price for the 24 strike. This is well above my average purchase price.

Update Late April: I made a stupid mistake and sold an additional -unwanted – covered call on GDX. It looks that I will have to sell at 25,5 USD. Luckily, my cost basis is way lower… A good lesson learned. In the mean time, I decided to buy back at a loss of 61 USD. I prefer to keep the long term potential of GDX save.





18 thoughts on “Covered call curse or bad behaviour?

  1. I’m writing an article now on my option strategy, which includes selling covered calls. Just as I must be content to buy a stock at a certain price before I sell a Put, I use the same guideline for selling a call. If I’m not content to sell the stock at that price, I won’t sell the call. I do often roll my “in the money” positions, and often the extra time allows the stock to fall back below the strike price (at which point, I may buy back the call). If it doesn’t, I’ll either roll again or sell the stock. I agree it’s best to have a pre-defined strategy.


  2. I do not have much experience in this type of investing/trading – but taking a profit of 12% in 30 days is pretty sweet – it’s not real money until you sell!


  3. Completely understand the part about trading attitude. Sometimes I wish I can have a computer trade stocks for me with a set algorithm like the more professional fund managers.

    Also, this post makes me want to learn more about options!


  4. Options… I understand it but not my cup of tea currently! I need to understand the markets for a few years before I feel comfortable trading them. Also, as you noted trading attitude is a major part of investing. Every time I get a new stock I have too much emotion, something I am trying to fix. Need to lose the take the profit today mentality.


  5. hey 🙂 thanks for sharing!

    I agree with you. trading covered calls is not easy. At the moment I use it to hopefully sell my stocks in KMI und STX. but it looks like they are falling again. Its hard to find a good strike with an acceptable premium.

    best regards


  6. Another strategy that I use if buying back the call is over priced, is selling a put option on the stock. If the stock continues to raise then the put option will expiry worthless.


  7. I’ve read quite a bit on covered calls but have not executed anything yet. Think I’ll just keep to trading stocks for now. 🙂


  8. There are many books on how to make money and never lose any money on option trading. I haven’t taken the time to learn the system. For now I’m good with dividend stock and real estate, however, it’s great to come here and see how you work the magic.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s