I'm trying to determine what the potential downside is for selling call and put options, aside from the obvious loss of money if the stock moves past the strike price of the call or put sold.
Right now, a stock that I follow has about a 7-8% premium of the strike price as the premium for a call or put option with 1 week or less before expiration.
I think that at 7-8% per week, it would make a ton of sense to sell cash secured puts to collect that premium. If they expire, I'll continue selling puts. If assigned, I'll sell weekly covered calls for another 7-8% of premium.
So far, I'm missing the downside. I see a potential that the stock price could drop X amount below my break even (strike price less premium received) but I feel that the risk of this is low as the drop isn't likely to surpass the 7-8% premium I'm getting for the short put.
To the up side, I understand that selling a covered call limits your profit potential once the strike price is reached. So unless the stock I'm looking at consistently fluctuates by more than say +/- 10%, I am having trouble understanding why this isn't 'easy money'.
Is there something I'm missing here?