In this short video interview that Erik did with Manual of Ideas editor Shai Dardashti, Erik talks about just one of the ways that the covered call option strategy can be misused.
As you’re likely aware, covered calls are just one of the “buy/write” strategies that are commanding a lot of press of late. Put simply, one owns a stock and then sells or “writes” a call on that stock for the number of shares that they already hold. In selling the call, the investor receives some option premium for agreeing to have his/her shares “called away” at a given price (the strike).
Just like any other financial instrument or strategy, these tools have a place where they are just super effective. But, they also have risks. This is where IOI wants to focus you as an investor – in understanding the RISKS involved in any investment. Going in “eyes wide open”, as it were, and then contemplating that risk as an element in your portfolio of risks.
This is effective investment management, to know where your risks are and be prepared ahead of time to recognize them and manage them, no matter if you are using stock, an ETF, options, a bond fund or treasuries. These instruments all have risks and we want to teach you to ask questions that illuminate that risk vs. reward picture before you say, ok let’s do that.
P.S. At one point of the video, Erik says “A covered call is two transactions: first, you’re long the stock; second you’re long the volatility.” This was just a misspeak! Covered calls are a combination of long stock and short volatility (jeesh)!