# Selling covered calls does not make sense

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?

• 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. Mar 2 '20 at 15:57
• BUT THEN YOU HAVE +5K BECAUSE YOU ARE LONG, you would not lose but make profit on the call Mar 2 '20 at 15:59
• @user253751 - Doing it once does not mean that you can do it zero times. At expiration, you do nothing - the contract is assigned and the covered call position will be closed. Buying a deep in-the-money short call to close for a large loss (laying down 5k-\$200) in order to carry forward a somewhat equivalent large paper gain in the underlying is a very, very bad plan. Mar 2 '20 at 16:03
• @Youss If Bitcoin is at \$10k, you sell a \$10k call, and it goes up to \$15k, you would have a bitcoin, and then you would have to sell your bitcoin at \$10000 instead of \$15000. You got paid \$200 for that privilege. That's a \$4800 loss. You could say that you earned \$200 so you didn't lose anything, but you could've earned \$5000 instead if you hadn't sold the call. Mar 2 '20 at 17:26
• The use of Bitcoin may be a bit distracting (can you even sell a call on Bitcoins? I don't know), but the general explanation of call options is useful. Mar 2 '20 at 18:01

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.

• "Most of the articles that hype selling covered calls as a reliable source of income tend to omit this not so minor detail." I think that pretty much sums it all up:) Thank you, I really thought I was missing some brain cells Mar 2 '20 at 16:04
• @Youss - No, you missed nothing. Your math and your analysis was dead on. Mar 2 '20 at 16:06

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.

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.

• Actually, selling a call is more of a flat/slightly bearish strategy - if you expect that the price of your asset won't be flat or only fall slightly (by less than what you gain from premium) Mar 2 '20 at 18:07
• @Michael Sure. What I meant by "bearish" is that a decrease in the price of the underlying can result in a gain and cannot result in a loss. Mar 2 '20 at 19:14
• Selling a naked call is a bearish strategy which is very different from selling a covered call which can be bearish, neutral or bullish, depending on the strike sold. Mar 2 '20 at 20:00
• @BobBaerker Well, what I meant is that the call itself is bearish. I might be using incorrect terminology, in which case I'd appreciate a correction. As for the covered call strategy, that's always bullish, isn't it? What's an example of a case where it's bearish? Mar 2 '20 at 20:57
• @Tanner Swett - It's the correct terminology for an isolated short call but not for the aggregate covered call. A bearish covered call would be where the strike price sold is in-the-money. You expect/fear that share price may drop so you want more protection. For example, XYZ is \$100 and you sell a \$95 call for \$6. That gives you 5 points protection and 1 point of potential gain (bearish). OTOH, selling a \$105 covered call gives you 1 point of protection and 6 points of potential gain (bullish). Mar 2 '20 at 22:22