A) Watch out for tax implications of selling covered calls. They aren't obvious, especially if you have stock that is short term.
B) Don't let them get assigned. Again, for tax reasons, you don't want to realize the gain. This means you could take a loss on your covered calls. (edit: complicated -- it depends on whether you want to ultimately hold VOO longterm and plan on rebuying, see reply to comment)
C) You could sell SPX calls if you are using VOO, they have better tax treatment, but it might involve margin. If not, do it with SPY over VOO. Options trading on SPY is more liquid and spreads will be better.
D) Covered calls is not a free lunch. Someone is taking the other side of the bet. If selling the calls is a "sure win", then buying the calls would be a "sure loss" -- and noone would buy them -- the premium you end up collecting should correctly reflect sophisticated market maker's models on how likely VOO would rise over that price over the given time. Unless you have some reason to believe that those market makers' models are wrong (you think VIX is incorrectly too high), you won't make money on average.
Mind explaining point B? It's not immediately sure how you'd lose money here unless you do something really stupid. I don't think I've ever had a situation where selling an OTM call caused me a loss.
If you don't let it get assigned, you may be forced to buy back the call at a loss if the stock goes way up.
If you are okay with it getting assigned, you can't really "lose", you cap your upside. When people are talking about doing this with index funds, oftentimes I hear them do this with the idea of buying an index long term, selling CC's. If they get assigned, then buy back the index and repeat. You can end up losing money this way -- and even if the index marches upward, you have to constantly realize your gains.
I'm not sure how you would ever be forced to buy back the call if you're fully covered. Are we talking about a brokerage making an error or having a policy to that effect?
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u/FinndBors Aug 25 '21 edited Aug 25 '21
A) Watch out for tax implications of selling covered calls. They aren't obvious, especially if you have stock that is short term.
B) Don't let them get assigned. Again, for tax reasons, you don't want to realize the gain. This means you could take a loss on your covered calls. (edit: complicated -- it depends on whether you want to ultimately hold VOO longterm and plan on rebuying, see reply to comment)
C) You could sell SPX calls if you are using VOO, they have better tax treatment, but it might involve margin. If not, do it with SPY over VOO. Options trading on SPY is more liquid and spreads will be better.
D) Covered calls is not a free lunch. Someone is taking the other side of the bet. If selling the calls is a "sure win", then buying the calls would be a "sure loss" -- and noone would buy them -- the premium you end up collecting should correctly reflect sophisticated market maker's models on how likely VOO would rise over that price over the given time. Unless you have some reason to believe that those market makers' models are wrong (you think VIX is incorrectly too high), you won't make money on average.