How to Lose Money Writing Covered Calls

The best way to lose money writing covered calls is to pick a stock based only on one criteria -- how high the one-month option yield is. Typically this will be found on research-stage stocks with little or no revenues, involved in a very risky area such as cancer drug research, usually at a time right before the company announces results from a major drug trial. Often, the trial is a failure and the stock tanks to nearly zero immediately after the announcement, never to recover.

The income from the covered call you sold is then more than wiped out from the sudden, permanent loss in the underlying stock that you own.



Here's another way to lose money writing covered calls:

Pick several stocks. Sell covered calls on them all, at the same time. Watch as the good ones get called away from you, then rise higher and higher, while the bad ones are yours to keep, as they fall lower and lower. This way you can lose automatically -- letting the market pick the losers for you, and run you out of the winners!

Also, to maximize your chance of losing, wait until right after a sharp rally in a stock before buying it and selling the call. Or at least pay no attention to timing your entry -- just jump in whenever the mood strikes you, or whenever you get some money to invest.

On the other hand, maybe you want to actually make money writing covered calls.