I feel like 2025 might not have big gains, maybe even end negative, or just a small positive. I’d be really surprised if we see a 15-20% boost like this year.
So, I’m wondering - does it make sense to sell out-of-the-money covered calls?
I’m considering selling December 2025 covered calls with a strike price 10% above the current level, which would give me a 3.5% premium.
If the market drops, I outperform by 3.5% and can use that premium to buy more shares at a lower price.
If the market goes up less than 13.5%, I still beat the market.
My only “loss” is if the market climbs more than 13.5%. Even then, I’d get a decent return.
Looking at more volatile investments like QQQ or individual stocks, there are even higher premiums and strike prices. For QQQ, I can get a strike 15% up with a 4.5% premium, so I’d only “lose” if QQQ jumps over 20%.
Does this strategy hold up? I’d think that most years it would work out, especially with something like QQQ. How often does it actually go up over 20%? Probably 30% of the time, right?
Even if I do lose, I could always roll the options into the next year and avoid selling the shares.
@Dakota
True, it’s not like shorting where you could lose big. But OP would still be betting against the market and could miss out on gains if it does end up stronger.
Timing the market is almost impossible. If your idea of 2025 is based on a hunch, that’s not the best way to make investing decisions.
Selling covered calls is a low-risk strategy, so this isn’t a wild idea. It could work in your favor, but it could also underperform if the market does better than expected. It’s not the craziest plan I’ve seen here, though.
If covered calls worked so well, wouldn’t covered call funds outperform the S&P 500?
I checked the last 10 years and more than half the time, the S&P went up over 10%. If it doubles, you’re capped at 13.5%. If it drops by 50%, you’d end up with -37%.
If you’re right about 2025, it might work out. But a lot could go differently.
If you want to ‘hedge your bets,’ why not diversify with investments that don’t follow the S&P as closely? Timing the market is tough, but diversifying is always solid.
I asked ChatGPT how often the S&P 500 hits double-digit returns:
Its answer: “Historically, the S&P 500 has double-digit returns about 60-70% of the time. For example, between 2013 and 2022, six years had double-digit gains. Of course, there are also down years like 2022.”
So how does this add up to a 70% success rate for your strategy?
