I hope that it's appropriate to ask this kind of question here and I'm not sure how to formulate it. I have a specific (real) example that I'd like to outline to see if I understand this correctly. Please confirm or correct my analysis.
Ignoring fees, suppose I bought 500 shares of stock A at $15.75 and after it dropped a dollar, I became concerned that its price might drop a significant amount more (a few dollars) but was reluctant to lock in the loss right now.
The May 2021 $10 strike call has a $7.30 premium. Does this mean I could write 5 call options and if the option is exercised I would make about $625? And if instead, the stock dropped below $10, I wouldn't lose anything as long as I sold the 500 shares before the price dropped below about $8.75?
I suspect that I've made an error because it seems too easy to get an 8% ish return for basically zero risk.
*** Thanks for the help. Accepted the answer I did because this bit
"The potential return of an option position reflects exactly what the market thinks it's worth. There's a reason for that."
reminded me not to fall into the trap of thinking that I know something the market doesn't (thinking of P/E ratios looking "cheap" or "expensive" etc).
Thanks!