Covered Calls Cappin’

Hey hey hey!

Happy March Madness everyone. Here at Stonk Enjoyer, we don’t show bias to any team but may the hypnotoad be with you.

Side note - We will be taking the next two Wednesdays off for some time of rest and Easter celebrations.

Excited to be back in your inbox on 04/10.

This is not investment advice and is intended for entertainment purposes only.

Covered Calls Cappin’

_{Reference:
Cap: (Noun) Gen Z slang for lie or something false; Something you don’t want to be true.
FOMO: (Noun) Fear of missing out; Often felt by people who are San Antonio Spurs fans.}

When it comes to investing, things don’t have to be too fancy or complicated. A lot of what you do just depends on your time horizon and financial goals.

I have other 25-year-old friends who are individuals with no dependents and are saving close to 50% of their income with no dire need for a massive amount of liquidity anytime soon. Many of them just buy a basket of stocks or ETFs and let their wealth build over time.

This is great. Because sometimes overcomplicating things in your portfolio is not what is right for your investing goals.

For the scenario above, Covered Calls may not be the best strategy because if you’re not careful, they can act as a price ceiling for your gains.

And losing money is CAP (see Gen Z slang definition above).

A Self-Imposed Price Ceiling

It’s just the nature of a covered call.

Writing covered calls establishes a price ceiling and limits potential gains within your portfolio.

You’re then under obligation to sell your shares at the predetermined strike price if the stock rises above it, thereby capping your potential profits.

You get paid for this risk in the form of a juicy premium.

Because of this, you may suffer severe “hindsight is 20/20 syndrome” & potentially “FOMO.” But if the price of the underlying stock goes down, you may get to flex to your friends that you were right (not that I would ever do this).

The Trade-Off

So writing covered calls imposes a trade-off between generating income via juicy premiums and potential capital appreciation.

It creates a predefined maximum profit level within your portfolio.

So how can you decide if covered calls fit your investing needs right now?

If you are one of many affected by recent layoffs, you may think the extra income is worth it.

But if you do not need the premiums, then consider the risk of capping your gains as we sit in a market that is having a pretty phenomenal 2024.

As always, do your research before getting in the mix.

Weekly Tidbits

• Interest Rate Bonanza: The Fed meeting wraps up today and Powell is expected to announce whether we will likely see two or three rate cuts for the rest of the year. (Or in the darkest timeline… none?!?!)

• Japan’s Rate Hikes: For the first time in 17 years, Japan raised rates from their long-standing 0% rate environment.

• Bracket Perfection: The odds of a perfect bracket, if you were to randomly select each victor, are 1 in 9.2 quintillion… good luck to all my bracket makers!

Meme of the Week

Credit @InvestmentKage