6/3/2010 5:01:48 PM
The main downsides I see from covered calls is that it limits your upside but leaves you open to downside movements in the stock. Also more brokerage and tax because you trade more often.
Why would you limit your upside potential if you are bullish on the stock?
It Doesn't necessarily limit your upside it depends on what your trying to do. Guys that trade covered calls fall into two camps they are either trying to get called out or not, if your a trader taking the trade to get called out then your not worried about limited upside your just shooting for your return for the trade and then do another one next month. The other people are the ones that enter the trade only buying the stock for a swing trade or maybe even a trend trade and when the stock is getting mature in its swing they sell calls against it looking for a consolidation when the stock drops you can usually get most the premium in a few days thus enhancing their return while still owning the stock. If your with a good broker then the fee won't be much.