been writing covered calls for 25 years. long enough that i already made this mistake twice.
history repeats itself, and nothing has ever been truer in the markets. i've watched this movie already and it always amazes me how most investors don't learn from the past.
first time for me was the dot com run in the late 90s. everybody was writing calls on the names that only went up, Cisco, Intel, Yahoo. i still remember the pets dot com sock puppet during the super bowl. felt totally normal at the time. second was 2007, and that one i remember because it cost me. the financials, Lehman, Countrywide, Citigroup. i was writing calls on Citi the whole way down, and it turned into years of selling calls just to keep up with my own paper losses. the premium wasn't income at that point. it was me trying to bail water.
now it's the mag 7 and it looks the same to me.
https://preview.redd.it/62njmoxsklgh1.png?width=1024&format=png&auto=webp&s=59d8a72555843171431cc19ee4fdb190bed638be
a handful of names run hard, the premiums on them look juicy, and everybody starts writing calls against them because the income looks great and the stocks keep going up anyway. i was right there doing it. it feels like free money, and for a while it basically is.
what people miss is a covered call caps how much you can make and does almost nothing for you if the thing drops. so when one of these finally turns, and eventually one always does, you take the full fall and the premium you collected barely covers any of it.
and that juicy premium was never a gift. it's just volatility wrapped in a bow. a boring dividend name might sit around 20% implied vol. the hot momentum names run 40, 50, and when one really gets going it can spike past 100. the premium scales right up with it. so when you see a premium three or four times what the boring name pays, that's not three or four times the opportunity. it's the market pricing in three or four times the move, in either direction. people see the big number and read it as income. it's really a warning label.
so here's what i actually do now. i don't write calls on the names everybody's excited about. i write them on boring stuff. slow dividend payers, the kind of company nobody's posting about. the premiums are smaller, but they're smaller because the stock isn't going to swing 15% on me in either direction. i keep collecting, month after month, and i'm not panicking before earnings.
and if you are going to write on a high flyer, at least respect what the premium is telling you. don't sell a strike you'd be sick to get assigned at, and don't write into an earnings print thinking the juicy premium is free. it's juicy for a reason, and that reason usually shows up the next morning.
not calling a top. i don't know what happens next, nobody does. i just know this shape. biggest premium, hottest name, everyone crowding in right when the risk is highest.
here we are again...