Selling Covered Calls

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Meanwhile your stock can go to zero while all you received is the premium.

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True but had you not sold the covered calls, your stock would still have gone to zero and you would have missed out on the premium.

Selling covered calls is a solid strategy with limited downside. You need to be aware of tax implications and changes in tax basis if you repurchase shares that have been called. You would also pay commissions on the share repurchase and lose out on potential gains but it's a solid strategy none the less.

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Are there any negatives to this strategy if you are holding the stock long term? I figure if someone calls me out on the option I will just buy back in once they get my shares. Am I looking at this wrong?

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I think that iAmBatman covered it well. Props to him.

You already said that this was a stock that you're holding long term anyway, so he's correct: the covered call strategy wouldn't play a part in the stock going down. It would still hurt... but it wouldn't hurt quite as much. And yes, if the option goes into the money on your selected strike, you'd have your shares called away. So make sure that you choose a strike where you'd be content to sell the shares. If you're prone to buy the shares back, whether trading in a retirement or non-retirement account, the wash-sale rule still applies - so be aware. It's best to familiarize yourself with the various tax provisions and pattern day trading rules related to stock and option trading. Having to deal with the IRS is a lot more painful than having a stock tank.

In discussing options, the overall lesson that I'd say is most valuable here is: be a net premium seller, not a net premium buyer. And there's nothing wrong with starting out with covered calls - that's Step 1 for the majority of option traders. Premium sellers are the consistent money makers. Premium buyers will tell you about that 1 time that they made 4000% on a trade. They won't mention the other 99 times that they lost 100% of their money. Straight up buying of calls or puts is more like gambling, IMO. Sellers rely on probabilities (and volatility)... no different than an insurance company. Just choose the options strategy that suits your account size, your knowledge and experience in the market and market conditions (neutral, bullish, bearish).

For anyone who's curious, there's something called the Wheel Strategy. It's pretty simple - nothing exotic. The general description is, you sell a cash covered (or naked) put at a strike where you'd be content to own the stock. Let's say you sell an 85 strike put and the stock is put to you at $85 and you collected $1 in premium on the put. OK, now you sell a covered call at a strike price of $90. You get $1 in premium for that. At expiration, the stock is trading for $89. The stock is still yours. So now you sell another covered call, this time at say $94. You get another $1 in premium. At some point the stock will likely be called away or you just dump it (if it goes down past your comfort zone or things change). But along the way, for every dollar of premium that you collect, your break-even is reduced by that amount. If you really like the stock and wouldn't mind picking up some more, you could even do a "strangle" (of sorts): sell a covered call above the market and sell a put below ($85 stock: 90 strike call, 80 strike put). One might go in the money, but they both can't. Worst case, you take on another lot that you wanted anyway, at a price where you're content... and you have even more premium in your pocket.

I'm just putting this novel out as a (very) basic example. You'd want to have knowledge of and access to implied volatility ratings, in-the-money probabilities/deltas, pricing, etc. before doing any of this. But it's certainly not that complicated and it most definitely is something to learn more about if you're serious about making money in the equity and option markets. Beats the hell out of the old buy & hope strategy, I tell ya that.

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True but had you sold the covered calls, your stock could have gone to infinity and you would have missed out on 100 (x) infinity of that minus the premium and difference to the strike price.

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True but it’s not a loss of capital, just a loss in opportunity cost. Not saying it’s what you want to happen but you won’t lose actual dollars.

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He was asking for the negatives about it. I gave it to him. Honestly I like using options as part of your portfolio, but thinking there are no risks on them and only an upside is dangerous.

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He was asking about selling covered calls, which is one of the safest option trading strategies there is.