I’ve been getting into selling covered calls recently. Mostly getting small premiums around $100-300. I’d like to know if I’m missing anything with this example.
I have over 400 shares of PLTR.
Current price is about $60 per share.
I can sell a covered call for 12/18/26 with a strike price of $95 for a premium of $14.50.
Is there a downside to selling a covered call this far out? I feel confident about the stock but would be happy to sell it at $95. If the stock drops a lot, I’d likely buy more.
The $1,450 collected upfront could even be used to buy more stock if it drops.
Am I missing anything? If the stock goes above $95 earlier, is there any way to offset the value I might miss out on if it keeps rising?
Selling covered calls is considered a conservative strategy and it’s meant to lower both risks and rewards compared to just holding the stock.
You’ll probably see a lot of smaller wins (get the premium and keep the stock) but also some big losses (get the premium and then have to sell the stock at a lower price) that will wipe out the smaller gains.
Both strategies can make money; holding the stock is likely to make more in the long run. If you check the performance of any ETF that uses this strategy, you’ll see this when compared to the returns of the assets they own.
If the stock rises above $95 earlier, is there any way to offset the value I would miss out on if it keeps rising?
The whole idea is to cap your upside while keeping full downside exposure in exchange for what the market sees as a low-value premium, considering the chance of the option being in the money.
Covered calls aren’t a win in every scenario. You lose if the stock drops more than your premium, and you also lose if the stock surpasses your strike price, factoring in the premium collected. It’s not really a loss but more like an opportunity cost.
There are strategies that combine different options. For example, you could sell that $95 call but also buy a higher call with a much lower premium. I’m not sure in what case that would make sense, but if you thought the price would either sit below the strike price or go above it dramatically, that could be a good strategy.
@Leif
The high premium means the market is pricing that option with a pretty high chance of it going in the money.
Yes, you could look at it as ‘if I’d sell at $95, why not sell the call?’ but if the stock hits $95 and gains momentum, it could blow past it. Would you have sold during a big upswing? You might reconsider.
Downside exposure is still there. But with the call, you’re committing to exit the position but getting paid to still take that downside risk.
If you want to offset the value you’d miss, you could buy more of the stock. Once you sell the option, you’re obligated to sell those shares if the contract is exercised. That’s the risk with covered calls. If you see it running up and expect it to go past your strike, it might be worth adding to your position earlier to catch more of the gains.
@Leif
Either way, you’ll lose all the profits between your strike price and when you buy the option back, making the contract sale a net loss. It’s trickier than it seems because you’ll always be waiting for the stock price to drop so the option price goes down.
Also, make sure to check volume and open interest before pulling the trigger. You can’t always get out of an options contract. You need someone willing to take the deal, and sometimes there’s no one there, leaving you stuck.