Thank you for the comment Joe. I’m happy to hear you enjoyed the article. Here are my thoughts.
- Setting the stop loss means the position becomes uncovered if you sell the shares at $272 apiece. You could stop your losses at $272/share and break even on the premium, but if QQQ rises to above $280, you have to buy back all of the shares and then sell them for $280 each. If QQQ happens to hit $290, you’d lose significant money because you buy all of the shares back at $290 and then have to sell them at $280/share. Usually if the price goes down to something like $272 in this example, I’ll close out the covered call and then sell a covered call with a lower strike price still out of the money to collect a higher premium.
- The $278.50 stop can become a cash secured put where you earn premiums, but only if you are committed to buying at that price. I have become bearish of most of the stock market lately and have cash waiting to get deployed at the right moment. There are always opportunities, but I am playing a little extra cautious for the time being. If I had to pick between selling out of the money (OTM)covered calls and out of the money cash secured puts, I’d pick the OTM cash secured puts.
- Buying the put would definitely eat into premium returns. Sometimes people will focus more on the fact they have a put for protection and view the covered call premiums as a way to essentially buy the put at a discount. It’s an extra hedge of protection for people who want it, but it’s not for everyone.
I used QQQ in this example because its an index for the NASDAQ that I wouldn’t mind holding onto even if it went down 10% or 20%. If it were to go down that much, I’d sell further out of the money covered calls to protect myself from a sudden increase in the ETF.
I hope you found this comment helpful. Please let me know if you have any follow up questions.