Sell Covered Calls

I’ve never liked the idea of selling covered calls.  If the equity goes up a lot the profit is capped by the call that was written.  If the equity goes down a lot the loss is only offset by the premium that was collected, which in terrible years (like 2000 and 2008) is still a big loss.  However, a reader asked me about writing covered calls, so I’m including an analysis here.  It shows pretty much what I expected, in the long run it is not a good strategy.

This is how I analyzed it:

  • Once per year, sell a 12-month call with strike price that’s above but closest to the QQQ price
  • It’s assumed an equal amount of QQQ shares are held
  • Profit is (option premium + QQQ appreciation – amount options are In The Money (ITM) at end of period)

Here is the table showing the results:

YearCovered Call ReturnQQQ Return
2007+10.5%+16.7%
2008-30.8%-42.4%
2009+16.6%+48.9%
2010+10.1%+22.6%
2011+8.7%+0.6%
2012+10.7%+18.8%
2013+11.7%+32.7%
2014+8.5%+20.6%
2015+7.2%+5.3%
2016+8.7%+9.2%

Years 2008, 2009, and 2013 in particular illustrate the downside of selling covered calls.

In very flat markets selling covered calls can return a reasonable profit, but over this study period you can see the market wasn’t flat year over year very many times (2011 and 2015 were the only times).  Of course, there’s no way to know a priori when the market is going to be flat year over year.

This is an analysis of past performance, but past performance is not a guarantee of future performance.

Comments / Questions: joseph AT StockMarketMovement.com