Investing General Discussion

Fogel said:

Covered calls aren't going to protect you if they have a large drop in price. If you want to lock in profits you'll need to set stop loses which aren't guaranteed or buy puts

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This needs to be clarified, it would all depend on the strike, I think you are thinking of a strike at or out of the money. It's possible to use calls to completely insulate a decline. A deep in the money call will fully protect down to the strike. The issue is taxes, you will collect a large premium from the call sale which will be a ST gain and then if assigned you turned your more tax advantaged gain into a smaller one. (assuming a >1yr hold)

For example you hold a stock trading at $120 you could sell the $80 strike which depending on exp would sell for around $42-50 any decline down to $80 would be protected. The reason for doing this would be you have a holding you cant or simply don't want to sell but are rather bearish on it's near term prospects.

Only time I do something like this is when I'm trading a range, so when NVDA was correcting earlier in the year I was holding the common and each time I felt it was near resistance I would sell a deep in the money call, then close that call at support. You could accomplish the same thing with entries and exits or puts but I try to collect premium not pay it.