Selling covered calls does not make sense

Question

I have one bitcoin and was thinking about selling call while owning the asset. However after some pondering I came to the conclusion that if price drops then the strategy can only be performed one time but when I google for this I see no mention of it and thus my question here. Let me explain:

Say bitcoin is trading at 10K. I sell a call for say $200. Price then drops to 5K. At expiration I receive $200.

Im down 5K on bitcoin but I have no problem with this since I was holding it anyway.

So now the problem arises; I can not sell a call anymore because if I do and the price shoots up to 10K I will have to lay down 5K (-200) for the call sold. So end conclusion; price has gone back to original but Im down 4800. So that means I can only sell call one time.

How am I looking at this in the wrong way? There is no mention of this on the internet. All I see is articles about generating income this way but how if one can only sell one time?

Answer 1

Selling a covered call locks in a sale price and should the contract be assigned, you will receive the strike price plus the premium received. Therefore, one should only sell a covered call if one is willing to sell the underlying at a target sale price. While waiting for that price, you'll receive a premium (income) which lowers your cost basis modestly.

In your example, let's assume that your cost is $10k. You sold what I assume to be a $10k strike for $200 so that lowers your cost basis to $9,800. Now BTC drops to $5k and your call expires. If you sell a second covered call at any price below $9,800 (less the second premium), you'll lock in a loss. So if you sell a $5k strike for $200, your prearranged sale price will be $5,200, locking in a $4,600 loss. Most of the articles that hype selling covered calls as a reliable source of income tend to omit this not so minor detail.

Your example demonstrates the asymmetric risk of covered calls. You bear all of the downside while only participating modestly in the upside. That would be acceptable if you're committed to buy and hold, but if that's the case, why are you selling covered calls? So if your position is "I was holding it anyway" then my preference would be that if you're going to chase a small upside then you should limit your downside. To do that, collar your position.

For example, BTC is $10,000. Sell a $10,200 call for $100 and buy a $9.800 put for $100. It's not exactly the same as the covered call but loosely, if BTC rises $200, you'll make the same $200. If it drops to $5,000, you'll lose $200. In return for that balanced R/R spectrum, you'll give up the $200 income from the initial covered call example. To me, that's a reasonable trade off.

Answer 2

One note, if the investor is an option-writer then their customers are option-buyers and their competition is other option-writers.

But the underlying is $10000. The investor writes a covered-call and uses the funds to buy a put-option. The underlying drops to $5000 and the investor has done something smart.

Then the underlying is $5000. The investor writes a covered-call and uses the funds to buy a put-option. The underlying rises to $10000 and the investor has done something dumb.

Basically, the covered-call position can benefit from a stop-loss order on the short-call. The short-call can be bought-back. A long-call combined with a short-call is a flat position.

Answer 3

I don't know how you come to your conclusion that "you can only sell call one time"; that's not accurate at all.

Selling a call is always a bearish strategy: you profit from the call if the price of the underlying remains below the breakeven point, and you lose money on the call if the price of the underlying rises above the breakeven point.

So let's look at your three scenarios:

Scenario 1

Say bitcoin is trading at 10K. I sell a call for say $200. Price then drops to 5K. At expiration I receive $200.

That's right. The price of the underlying remained below the breakeven point, so you profited on the call. You would have lost money on the call if the price had risen above the breakeven point.

Scenario 2

I can not sell a call anymore because if I do and the price shoots up to 10K I will have to lay down 5K (-200) for the call sold.

The second part of this sentence is right. If the price rises above the breakeven point, you lose money on the call. If the price stays below the breakeven point, you profit on it.

The first part of your sentence is not right; there's no justification for thinking that you can't sell a call any more.

Scenario 3

Say bitcoin is trading at 10K. You sell a call for say $200. Price then rises to 15K. At expiration you have to lay down 5K (-200) for the call sold. So actually, you can do it zero times. – user253751

BUT THEN YOU HAVE +5K BECAUSE YOU ARE LONG, you would not lose but make profit on the call – Youss

That's incorrect. You gain $5,000 from your position in the underlying but you lose $4,800 on the call (assuming that the strike price is 10,000).

Conclusion

Hopefully this makes it clear that it's not true that "you can only sell a call once." Selling a call is sometimes a good idea and sometimes a bad idea. But whether or not you've sold a call in the past doesn't matter at all.

You seem to believe that in Scenario 1, selling a call is a good idea, and in Scenario 2, selling a call is a bad idea, but there's no reason to believe any of that.