The key here is to sell options and almost never to buy options. One of the few exceptions that I can think of is a protective put to protect your long portfolio as a retail investor in a severe bear market or an index put if you are a fund manager trying to protect your client's portfolio (which is usually long in nature).
The simple answer lies in the fact that time works against you when you buy an option. The premium that you pay for the rights you receive in an option has time factor in it and this component decays exponentially in the last 90 days before its expiry (which is usually the third Friday of the month).
What is "covered calls" and when do you use it?
"You own a stock that is part of your long-term investment portfolio. You like it long term, but don’t see it going anywhere over the short term and would consider selling it, given the right terms. You would also like to generate some income, but you aren’t interested in selling your stock only to buy a CD with a next-to-nothing return.
There are two basic pre-requisites that you need to be aware of:
- you have already owned the stock
- you feel somewhat bullish but not too bullish about the prospect of the stock you purchased
- it limits your upside potential; you will still make a profit if you are assigned which is precisely the reason why I mentioned that you feel "somewhat bullish" about the prospect of the stock in the short term but bullish in the longer term as mentioned above: (Strike – Entry) + Premium received
- It helps to lower your breakeven point if you are caught holding a stock which has gone lower than entry price: Break-even point = Entry price – Premium received