Beware the Siren Call of Options Trading

This article should be called "The Novice's Guide to What Options Cannot Do for Your Portfolio." If you have not traded options before and are thinking of getting started, fine, but know that you cannot generate 3%-4% per month by selling covered calls against a diversified portfolio of stocks.

Before I get too deep, the big-picture thought here is that the options market does not give away excess return for nothing. Hold on to that thought and judge for yourself.

The other day I saw a TheStreet.com video with the two authors of a book about generating 3%-4% per month by selling covered calls, and it made me cringe. I do not know exactly what trades the authors make, but I can give the other side of the coin, free of jargon and Greek letters.

In the table below, I list three stocks from four different sectors, going out one month. I tried to look at stocks that I thought were representative of low volatility, medium volatility and high volatility, and for most of them I picked options that were slightly in the money as stated in the interview. In order to get 3%-4% for a month, you need to own a portfolio of hot potatoes, as opposed to a diversified portfolio in which you have a blend of low-beta and high-beta stocks that is consistent with your tolerance for volatility. ...