Writing covered calls is an investment strategy that works very well for some investors, especially at a time when markets are trading sideways or declining like we are currently experiencing. A majority of options expire worthless, skewing the strategy to the benefit of those writing the options and collecting premiums. Obviously if you go too far out the risk spectrum with options, you stand the risk of blowing up as recounted in gory detail in Malcolm Gladwell’s 2002 New Yorker article titled Blowing Up. While a covered calls strategy works great in theory, my personal experience has been a mixed bag and there are certain nuances to be aware of before adopting the strategy with gusto.
For those of you that are familiar with options, you can skip the next section borrowed from a premium post I wrote in 2019 to capture the merger arbitrage spread from Nvidia’s acquisition of Mellanox Technologies using options.