Buying a down trending stock to sell covered calls on can turn into a very bad idea very fast. Here are 3 reasons why selling covered calls on a downward moving stock can become a black hole in your account.

1. The Premium does not Make up for The Loss

The part that everyone loves about selling calls is the fact that you can make money up front. What no one tells you is that even though you are making money up front does not mean that the trade will be profitable.

If you buy a $30 stock and sell the $35 call for $1.4, and then the stock drops to $15 that is a bad thing. Sure you made $1.4 by selling the call, but that does not make up for the huge loss you took on the stock.

2. You Can Be Waiting A Long time to break even

If you buy a down trending stock it will most likely keep trending down. Think about it if you buy a stock that gets cut in half it needs to make a 100% return to break even. A 100% return just by holding the stock could take years or even decades.

Do you really want to hold onto a stock for that long?

3. Missed Opportunity

The thing people often do not consider is the opportunity cost of holding a stock so long. If you buy a stock which gets cut in half or worse and then wait for it to go back up, all those years of waiting to break even can be missed opportunity to profit somewhere else.

On the other hand if you were selling calls on a stock that is trending up or sideways you can still make the profit that come from selling calls without such a high risk of losing money on the stock’s value. And if you use stop losses you can control how much you are willing to lose.

For more on Covered Calls visit http://www.stocks-simplified.com/covered_calls.html

For more times to avoid Covered Calls visit http://www.stocks-simplified.com/Selling_covered_calls.html

Author's Bio: 

When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site stocks-simplified.com to help others learn.