Covered Calls Australia – Generate Consistent Cash Flow

Posted on admin No Comments

It is quite difficult these days for retirees to generate some consistent cash flow. The interest rates are not too attractive, and the yield on the 10-year Treasury bond is substantially below the long-term average. Many retirees today are even purchasing high-yield bonds, bond funds, and dividend-paying stocks in the hope of earning better yield. Unfortunately, the risk/reward ratio in the high-yield bond market is also not good right now–investors may not be getting proper rewards for the risks they are taking. The dividend-giving stocks could prove to be a nice income alternative, but it too depends upon an individual’s risk tolerance.

Covered Calls Australia – Generate Consistent Cash FlowThere is one strategy that many retirees (and investors too) often overlook, which by the way can help generate consistent cash flow. It is the covered calls strategy. Writing (selling) covered calls in Australian market against dividend-paying stocks can generate steady cash flow. However, remember that options trading in Australia is not suitable for all investors. The major drawback of writing covered calls Australia is that investors are limiting their upside potentials of their stock by giving someone the right to call (demand) it from them before the expiration date or at a strike price. Nevertheless, if the consistent cash flow is the main objective, writing covered calls Australia is worth considering.

Volatility is a crucial motif for investors to understand. Two totally different stocks may have same returns, but have entirely different volatility characteristics. The two kinds of volatilities that investors writing covered calls need to understand are implied volatility and historical volatility. The implied volatility is determined by the price of the option contract, and it will change with different expiration dates and strike prices. The historical volatility, also known as statistical volatility, is a measure of how unsteady the stock has been, and it can be calculated over different time-frames.

When investors are considering writing covered calls for income, they should be careful with the stocks that have high option-premiums. Options with high premiums may have a good return potential, but they are expensive and their implied volatility is high. A high implied volatility suggests that the market is expecting a wild price movement; perhaps because of some news, such as a legal case is about to be settled, or an earnings report is due.

No matter how attractive those high premiums may seem to be, retirees should stay away from such option contracts. Instead, they should buy stable, large-cap stocks that pay a decent dividend and have low volatility. The option premiums, of course, may seem mediocre, but at least, the volatility is low, which is important to generate steady cash flow.

Overall, writing covered calls is a good strategy to generate consistent cash flow. Retirees should stick with the large-cap stocks so they can get the best performance.

Tips on How to Use Covered Calls Australia Successfully

Posted on admin No Comments

Writing covered calls in Australia can indeed produce consistent monthly income for investors. A covered call is an option trading strategy where investors write “sell” call options against the shares they already own. Usually, a call option consists 100 shares of a particular stock. In exchange for writing call options, investors receive a premium. The premium, however, comes with an obligation; if the buyer exercises the call option, the investor is obligated to deliver the shares to the buyer.

How to Use Covered CallsFortunately, investors already own the underlying stock, so their potential obligation is very much “covered.” Because the obligation of delivering the shares if the buyer exercises the option is covered, this strategy acquires its name “covered call” writing.

Covered call writing in Australia is a fairly conservative strategy. Nevertheless, there are risks associated with it. With proper ASX options advice, however, covered call writing risks can be minimised or averted. Here are three tips on how to use covered calls Australia successfully.

Keep market volatility in mind

Stocks that exhibit medium implied volatility are the most suitable for the covered call strategy. In case implied volatility is low, the premium that investors get will also be probably low. The premiums will be high if the implied volatility is high, but there is a trade-off.

If the implied volatility is high, the probability of the stock to move considerably in either direction is also high. It could mean that investors have a higher chance of taking a loss if the stock drops significantly, or of having their stock called if the price increases. With covered call strategy, it is to be remembered that if the price rises (and exceeds the strike price), the call buyer can exercise the option and demand the stock.

To be safe, investors should consider the stocks with options that exhibit medium implied volatility. Medium volatility should yield enough premium to make the trade worthy. It also eliminates the big risks that are associated with high-volatility stocks.

Plan with what to do if the stock goes down

Investors normally sell a covered call on a stock on which they are bullish in the long-term. It is really helpful to have a plan in place if the stock goes downward. Nobody likes it when stocks plummet–right? Investors have more choices than they think, however. Many investors assume that writing a call lock them in a position until the call expires. This is not true. Investors have the choice to buy the call and remove their obligation to deliver the stock.

If the stock has fallen since the investor sold the call, he or she may be able to buy the call back; that too at a cost lower than the initial sale price. This way, an investor can make a profit on the option position. Doing this buy-back also removes an investor’s obligation to surrender the stock if exercised. Investors also have the option to dump their long position and prevent further losses in case the stock continues to drop.

Consider buy-writes

If investors are really into covered calls writing, they need to consider an excellent strategy called “buy-write” first; with this strategy, they can buy the stock and write the call option, against that stock, in a single transaction. The strategy of buy-write is not limited to convenience only. One thing this buy-write strategy offers is an instant income, in the form of an option premium. Besides, such options often expire worthless; hence, the investors will get to keep the premium, as well as the ownership of the stock. In the bull market, buy-write strategy can underperform, but in flat and bear markets, the strategy is one of the best strategies for investors.

To conclude, covered calls can be an excellent strategy to generate consistent income. Normally, investors write covered calls on stocks, on which they are long-term bullish. Covered calls are useful on stocks that are stagnant in the short-term. Of course, there are some risks associated with covered calls, but with proper covered calls advice, risks can be minimised.

Ways to Use ASX Options as a Strategic Investment

Posted on admin No Comments

Trading ASX options as a strategic investment (investment made with the aim of generating safe, consistent returns), is very important for traders. Options trading in Australia provides traders excellent strategies that help boost their profits, decrease costs and extend trading approach. Even though many investors are reluctant of using ASX options, it is crucial to understand that these financial derivatives are no more or less risky than any other form of trading. ASX options are excellent financial derivatives that, when used safely, can be very beneficial to your portfolio. Another good thing about ASX options that most people do not realise is that they are short-term trading derivatives, and so it requires significantly less technical analysis than ordinary stock trading. Nevertheless, it is necessary to have some technical analysis skills for trading options as it can help predict the market movement and movement’s magnitude.Ways to Use ASX Options as a Strategic Investment

Here is how you can use ASX options as a strategic investment:

Recover some of the cost of your share market investment

If you already own some shares, you can slowly recover the cost of the shares by selling call options against them every month. This strategy is called covered call writing. Covered calls Australia are effective, and over a year, it is possible to write (sell) covered calls several times that you can in the course of time pay off everything you invested in the shares. Because you will already be having enough information about your shares, the technical analysis for covered calls Australia will not be complex.

Buy stock for half price

Buying deep in the money (DITM) options for a short term momentum trading is an excellent way to buy stocks at half the price. If you see possible growth of the stock over the next couple of months, you can rip the benefit from the strong delta of the option and purchase the rights to it at a substantially reduced premium.

Get paid to buy stocks

If you have a certain stock in mind that you would like to own, buy do not want to buy it at a higher market price, then the strategy of selling naked put options may prove to be useful. Every month, you sell put options against a stock, but at a strike price or exercise price that is lower than the price at which the stock is currently trading. In case the price of stock goes up, your put expires worthless, and you retain the money. If the price drops to your set price, you can buy it and wait to bag profit as the stock recoups back up. Once you have bought the stock, you can sell covered calls to further reduce the price you paid for it.

Profit from unstable markets

Do not sit idle in a volatile market. Look at the chances presented in such a market. Options strategies such as buying strangles or straddles, selling credit spreads, dealing in butterflies, etc. can yield excellent profit in a volatile market.

Selling the future

Using the credit spread strategy is an excellent way to make a steady profit of about 10% per month. Identify the market trend, and sell credit spreads every month to build your portfolio.

Options trading in Australia can be risky, but with the right approach or with a good ASX options advice, risks can be minimised and profit can be made. Today, a range of options trading strategies is available through which traders can yield excellent returns in almost any market condition. If you want to gain more insight on different ASX options strategies, including covered calls Australia, butterflies, and others, expert advisors at Total Options can help. Get in touch with them at

Covered Calls Australia – An Excellent Strategy That Every Investor Can Use

Posted on admin No Comments

Every day, transactions of billions of dollars happen on the Australian Securities Exchange (ASX). Some of thCovered Calls Australia – An Excellent Strategy That Every Investor Can Useese transactions are made by big financial institutions while other transactions are made by well-known insurance companies. One of the techniques used by the gurus of Australian share market to generate consistent income is writing (selling) covered calls. Writing covered calls is a simple technique, which is eminent among institutional traders, but a mysterious one to the novice or self-directed investor despite being lucrative and even deemed “easy” by ASX itself. In other words, you do not need to be a share market genius in order to learn and try writing covered call.

Most investors probably invest in share market in order to yield consistent monthly income from their portfolios. Instead of investing in popular mutual funds or purchasing and holding certain stocks hoping for a rise in their value, why not devote some proportion of your account writing covered calls every month? The versatility of covered calls Australia can generate consistent monthly income for any investor with a trading account. In order to generate consistent monthly income with covered calls writing, however, obtaining the proper options trading education is vital.

Here is how covered call options trading in Australia works:

If an investor has 1000 shares of Telstra stock at A$ 5.00 per share and is ready to sell those for a profit, that investor can sell or give away the right to someone to buy their shares at A$ 6.00 per share. In the terms of covered calls Australia, the investor would be selling the right (with obligation excluded) to someone to purchase their Telstra shares at the A$ 6.00 strike price. The income that the investor gets from selling the rights to someone is called premium. In our case, the premium for writing a thirty-day option is A$ 1.00 per share.

Like any other investment strategy, there is a downside to writing covered call options. If Telstra shares should rise to A$ 9.00, in the above case the investor would be obligated to give away or sell their shares at A$ 6.00. If Telstra shares never cross A$ 6.00 until the date when the option expires, the investor is eligible to keep their shares as well as premium income. The key to successful covered calls Australia trade is to know which particular stocks to hold for writing covered calls and which ones to invest in for the long period.

For quite some time now, writing covered calls in Australian share market has been a top technique used by professional investors to generate guaranteed monthly income. You too, no matter if you are a novice, can try writing covered call option in order to create steady monthly income. With covered calls Australia, risk is low, and income is consistent.

To know more about covered calls Australia, contact the vastly experienced options trading experts at Total Options They can give you deep insight on covered calls and can also provide excellent Australian share market advice.

Important Criteria for Selecting the Best Stocks on Which to Write Covered Calls

Posted on admin No Comments

Writing covered call is one of the most popular strategies that many expert traders as well as traders new to options trading use to generate income. The strategy is popular for two reasons:

  1. It is a conservative strategy
  2. It is easy to understand and trade

For those who are unfamiliar with the covered call strategy, it works in the following manner. For every 100 shares of a particular stock that you already own, you can sell someone the right (no obligation) to buy those shares from you at a certain fixed price (strike price) before an expiration date. The amount that you get from writing (selling) the call is called premium.

At the expiration, if the stock ends up above the strike price, you will be obligated to give away your shares at the agreed price. If the stock ends up below the strike price, the option expires as worthless, and you will be able to retain the ownership of your stock, which you can again use to write the covered calls.

While covered call writing is a straightforward option strategy, it does not mean it is easy to make excellent returns consistently. The strategy has two major risks:

-          When the price of the underlying stock takes a big leap, you will miss out on gains above your strike price because the buyer will exercise the option and you will have to sell at a price, which is below market price.

-          When the value of the underlying stock falls substantially, the loss from holding your stock will probably exceed the gain from the premium income.

Because of such risks, it is crucial to select a proper trade plan. Randomly selecting stocks on which to write covered calls or selecting certain stocks simply because they have high premium will probably lead to failure.

Here are two important criteria for selecting the best stocks on which to write covered calls:

Important Criteria for Selecting the Best Stocks on Which to Write Covered CallsSelect stocks with good technical. There is no need for you to become a technical analyst in order to be successful with covered call strategy, but knowing the basics of technical analysis is helpful. If you are going to be making short-term trades, it is essential to have some kind of basic understanding of technical analysis or access to some tools and resources, which can help you to determine the short to intermediate term technical health of a stock. By knowing the technical health of a stock, you can also determine its covered call suitability.

Select stocks with realistic premiums. If you are going to be writing covered calls for income, you will want to pick stocks (technically healthy) with a good amount of premium so that it be worth your while. Good premium does not mean high premium, but realistic premium. Options with very high amount of premium are dangerous ones. They have high volatility and uncertainty. No matter how big returns they yield, these types of stocks are not fit for reliably successful covered call strategies.

Covered calls strategy can be an excellent resource to generate income. However, just because it is easy to understand and to trade does not mean it is easy to execute on a consistent basis. Fortunately, there are various resources available that can help improve your covered call returns; for instance, the experienced advisers at Total Options. Covered calls Australia advisors at Total Options have the skills as well as vast experience that help them give you excellent advices that can improve the performance and returns on your covered calls. Know more about them by visiting their website

How Covered Calls are Beneficial

Posted on admin No Comments

How Covered Calls are Beneficial

Writing covered calls can be an excellent strategy to increase investment income. It is a conservative option trading strategy whereby investors write (sell) call options against the holding of the underlying shares. Using the covered calls strategy, the investors get to earn a premium by writing (selling) calls. At the same time, they also get to enjoy all the benefits of underlying share ownership, such as voting rights and dividends. To understand how a covered call is beneficial, look at the following scenarios.

Before looking at the scenarios, let us first set up a situation.

The Situation

Suppose the shares of ABC Company are trading at $15. So you purchased 500 ABC shares for $7,500 ($15 x 500). Now you decide to employ a covered call strategy. So by employing a covered call strategy, you sell someone the right to purchase your ABC shares for $15.50 for the few days for a premium of $1. This means that you are selling a call (1 call equals 100 shares) with a strike price of $15.50 and a premium of $1. Your transaction and cash flow will be:

Your Transaction

Your Cash Flow

You buy 500 shares of ABC for $15

- $7,500

You sell 5 calls (each for 100 shares) of ABC at $15.50 for $1 premium

+ $500

 So your initial investment is $7,000 ($7,500 – $500).

Now let us look at the different scenarios that could happen at the call expiration day.

Scenario 1

At the expiration day, the share remains unchanged at $15. Your calls will expire worthless because why should anybody buy the shares for $15.50 if they are available in the market for $15. Now your transaction and cash flow will be:

Your Transaction

Your Cash Flow

You purchased the 500 shares of ABC for $15

- $7,500

You kept the premium of 500 shares (500 x $1)

+ $500

You sell 500 shares of ABC for $15 (expire day value)

+ $7,500

 So at the end, you still made $500. How? Well, your initial investment was $7,000 ($7,500 for 500 shares less $500 premium on covered calls) and you sold your investment for $7,500 (500 shares x $15 (share price at expiration date)).  That gives you a profit of $500 on your initial investment or say, just over 7% return. This was just without any stock movement. Let us look at scenario 2 where the share price increases.

Scenario 2

At the expiration day, the share price increased to $16. You are being “called” from the owner of the options you sold—you are obliged to sell your ABC shares at 15.50 (your strike price). Ok, now let us again look at the return:

Your Transaction

Your Cash Flow

You purchased the 500 shares of ABC for $15

- $7,500

You kept the premium of 500 shares (500 x $1)

+ $500

You sell 500 shares of ABC for $15.50 (expire day value)

+ $7,750

This results in a profit of $750…your initial purchase price $7,000 (premium included) minus sales price $7,750. It is almost 10.7% return on investment.

What if the share price drops? Well, let us look at scenario 3 for that.

Scenario 3

At the expiration day, the share price dropped to $14.50 So now your return will look like:

Your Transaction

Your Cash Flow

You purchased the 500 shares of ABC for $15

- $7,500

You kept the premium of 500 shares (500 x $1)

+ $500

You sell 500 shares of ABC for $14.50 (expire day value)

+ $7,250

 Adding up the above figures, you still make $250 profit, even though the price of your shares dropped. You will keep on making profit as long as the share price remains above $14.

Looking at the above three scenarios, opting for covered call strategy is not a bad idea at all. Further, if you have an expert covered calls advice, you can substantially increase your investment income. If you want the best covered calls advice in Australia, then get in touch with Total Options. They have a vast experience in options trading in Australia. They can also educate you on how options trading and covered calls work in Australia.

Understanding The Risks And Benefits Of Covered Calls

Posted on admin No Comments

For those who are not too familiar with common trading jargon, you may not readily understand the concept of the covered call strategy and its function in trading activity. To shed some light on it, basically, it’s a low-risk strategy where an investor or trader holds a long-term position in an asset and writes/sells call options on that particular asset in hopes of generating a bigger income from it.


However, like all strategies for trading and investments, using covered calls has both benefits and risks. It’s imperative to know what they are so you can take a step back and analyse your trading situation before applying this strategy.


The most important advantage is that compared to all the other known low-risk strategies out there, it’s said that becoming an expert at covered call writing can secure the highest profit – much, much higher than if other strategies were used. Everybody’s into trading to harness wealth, so this advantage is surely the most attractive.

The second benefit covered calls offer is the way traders actually have more control over the outcome. Writing a call allows traders to really examine the conditions their stocks are dealing with and determine the best decisions on what should be done, say, if the stock’s value declines after the traders have entered a position, or if the price of the stock appreciates. The trader who has mastered covered call writing has that great opportunity to fortify his wins and mitigate losses.


As for the risks or disadvantages, profit potential, when investors have established a covered call position, is automatically limited to the strike price (the price at which a put or call option can be exercised). So, if you were too hasty in writing a $70 call on a stock that you originally purchased at $65, and due to an unexpected twist of events the market dictated that that the new value of the stock is already up at $85, you have no other option but to sell at the price that you have written. Instead of a $20 profit, you limited yours to a mere $5.


And the second risk is that due to the simplicity of the move, a lot of investors are easily convinced that they already know everything that needs to be considered in employing covered calls, only to realise that they’ve traded too soon. It takes at least three to four months to fully explore the capabilities and potential of this strategy.


Therefore, for those who want to use covered calls to help themselves reach an advantageous position as traders or investors, it’s crucial to get some mastery in it. This is possible through persistent study, practice, and proper coaching from respected names in the trading industry. In time, they can truly expect to make the strategy work optimally for them in securing trading success.


What Are Covered Calls?

Posted on admin No Comments

One of the cardinal rules of investment is fully understanding the terminologies used as well as the strategies implemented. This allows the trader to make sound investment decisions as well as minimise associated risks.


In options trading, one of the strategies used by many seasoned investors is covered calls. But what exactly is a covered call option?


Owning a stock entitles you to several rights. These rights include the option to sell stocks at their current market value any time you wish to. In covered call writing, you are selling to the buyer such a right at a predetermined price prior to the expiry. Essentially, the buyer attains the legal right to purchase shares of the underlying stock at a predetermined price (also called strike price). If you (the seller) own those underlying shares, the options are called covered because the shares are not purchased at an open market and at a predetermined price.


This strategy is viewed by many options traders as conservative strategy. It is particularly beneficial for traders who are bullish or neutral in their outlook on some of the equities in their portfolios. Investors who are looking to trade upside potential for downside protection and those who want to be paid for the assumption of the obligation of selling stocks at a strike price should also consider this strategy.


This strategy can be implemented when you want to produce income from some of the stocks in your portfolio. Other investors utilise this strategy in order to profit from option premium time decay. It is also advantageous to make use of covered calls if you want to keep your stocks for the long-term, either for the dividends or the tax benefits. Some investors who feel that the value of their stocks won’t appreciate or even drop in value opt for this strategy. Finally, a lot of investors who feel that their stocks are overvalued use this strategy to their advantage in order to profit.


It is important to note, however, that this strategy has its risks. If you are going to use this strategy, it is important to hold on to the shares. If you do not, you risk what is called a naked call. In a naked call, the potential for loss increases when the stock increases in value. If such happens, your next recourse would be to purchase back the option position. However, you may suffer some losses, both in terms of cash outlay and profit.

The Covered Call Stock Option Strategy

Posted on admin No Comments

A popular stock option strategy used by investors is the covered call. The covered call is one in which you would write a call option contract for a number of shares of stock you actually own. If you own the stock before writing the call option it is called an overwrite. If you buy the stock as you create the call contract, it is called a buy-write.


The stock you own is covering the call option contract which is where the name is derived from. This stock option strategy is generally used when the market is going sideways or you form an opinion that a bull market is developing.


With the covered option, the price for the underlying asset has been determined already unlike in a naked option where you don’t own the stock. When the option is uncovered, you will have to go to the market to buy the stock if and when it becomes necessary to cover the option. It is possible to cover your option at any time before the expiration date of the option contract.


The covered call stock option strategy is less risky than the uncovered option simply because you already know the price of the underlying asset. The covered call is used to generate income from the underlying asset or stock.


You get to keep the premium on the covered call and if the contract expires then you also profit from any gains in the stock value. If the option is exercised you will earn the premium in addition to the difference between the purchased stock price and the strike price. This stock option strategy can also protect you from underlying stock that that may experience a price decline.


The breakeven point for the covered call stock option strategy is equal to the stock purchase price less the premium received.

What Is a Covered Call Option Explained – Selling & Writing Strategies

Posted on admin No Comments

What Are Call Options?


Before we can discuss how to write covered calls, we need to first understand what a call option is. A single call option contract is an agreement that allows the buyer to purchase 100 shares by a specified expiration date at a certain strike price. These contracts can be both “purchased” and “written” depending on where one sees the company’s stock price going. The value of the contract will be based, in part, on the following:


How volatile the stock has been in the past

Anticipated or expected future price volatility

Amount of time until contract expiration


Types of Call Options


There are two types of call options: naked and covered. To understand covered calls, you need to first understand naked options.


1. Naked Call Options


In a naked call option, you write call options contracts without owning the underlying shares. While your bets might pay off, you could lose a lot of money too.


If you are writing naked call options, you think there is a chance a company’s stock price may fall. As the options writer, you have the flexibility to set the strike price and expiration date. If someone buys your options, he has purchased the right to acquire the stock from you at the predetermined strike price before the expiration date. This person has acquired your options since he believes the company’s stock price will rise before the expiration, and therefore wants to lock in a lower price. In effect, by writing a naked call option, you are betting that the company’s stock price will fall while the buyer is betting that the stock price will rise. It is simply two people speculating on share price direction.


The major risk involved with writing a naked call option is in the event that the stock rises in price. In this case, when the purchaser of the options exercises his options, you are forced to acquire the physical stock at the current price and sell these to the option holder at the predetermined lower price. You will be stuck with a loss, which sometimes can become crippling to your portfolio depending on how high the stock has risen.


How can one avoid this unlimited downside? By writing call options while also owning the underlying shares, known as a covered call, you can create numerous strategies that can net you significant income while limiting your potential losses.


2. Covered Call Options


In a covered call strategy, not only would you write call options, but you would also own the actual stock for which you are writing the options. Thus, if the stock price rises, while you would still be liable to provide the option holder with the physical shares, you can simply provide the option holder with the stock in your portfolio instead of being forced to buy the stock on the open market at the new, higher price. You have effectively eliminated the major risk that comes with a naked option.


Is the Covered Call Option Right for You?


Generally, a covered call strategy is ideal for someone who is bullish on a company’s stock price and therefore has acquired a substantial amount of shares, but also wants to create an additional income stream that will lower his net cost of shares and possibly protect him against a loss in share prices. By writing call options, the downside risk has been reduced, although the upside is also capped. Thus, if the stock price does indeed fall, the investor will lose money on his actual shares, but this will be offset by the income derived from selling call options (which presumably will not be exercised). Selling covered calls has the potential to be more profitable than simply holding shares if share prices fall, stay the same, or rise mildly. The only time that share investing will be more profitable than covered call trading is when there is a significant rise in share prices.


Covered Call Example


This is a simple example of how to employ the covered call strategy. You own 100 shares of Google (NASDAQ: GOOG). The share price is $550. You sell one 6-month long call option contract for $33.21 per share at a $550 strike price to protect you from a potential decrease in Google’s stock price.

At the end of those 6 months, the following may be true:


Share prices of Google are $550 or above. If the options are exercised, you must sell your shares for exactly $550 per share. You will have made a 6% return in 6 months from the $33.21 per share of income. Your break-even point is if Google is trading at $583.21 ($550 + $33.21 per share options premium); that is, you would have made the exact same amount of profit if you had simply held your shares and not written the call options. If Google is between $550 and $583.21, then you made a wise investment decision by writing the call options. If Google ends up higher than $583.21, you would have been better off not writing the options. Therefore, if you strongly feel that share prices will go higher than $583.21 in 6 months, you may want to simply hold the shares. But if you expect share prices to be neutral or have very mild gains, then selling call options is a great way to create income revenue as a replacement for the anticipated lack of capital gains.


Share prices are less than $550. In this case, the options will not be exercised and you will keep both your shares and the income from selling options. The $33.21 per share will help offset your share price loss. Your break-even point is if Google is trading at $516.79 ($550-$33.21). If Google trades above this point, you will have made a profit; if it trades below, you will have suffered a loss. Effectively, even one penny below this break-even point is where you would have been better off selling your 100 shares at $550 instead of holding them and writing the call options.


The big advantage for covered call writing as opposed to simple stock investing is an immediate 6% income payout regardless of how share prices perform. In this instance, the combination of options revenue plus share price movement means we are profitable even if stock prices fall up to 6%. The only time that holding shares is more advantageous than the covered call strategy is if share prices rise more than 6% in 6 months, which is certainly possible (but even in this case, you still will have made 6%).


Of course, the one other large downside is that we are forced to hold our shares until the options contract expires, or alternatively buy back the contract prior to expiration. This limiting factor should be taken into consideration as well.

Covered Call Strategies


Below are a few quick strategies you can use with covered calls. Some apply to blue chips stocks, others to high-risk companies, and some for those stocks for which you expect minimal gains.


1. Boosting Dividends


Buying shares and selling options contracts lowers your effective cost basis. In addition, you will still collect 100% of the dividends from companies who provide these payments. As a result, selling options contracts will increase your dividend yield. Below is an example:


You acquire Nutrisystem (NASDAQ: NTRI) shares, which provide quarterly dividends at $0.175 per share, at the current price of $14.24.

You then sell call options that expire in 9 months with a strike price of $10 per share that are valued at $4.50.

You receive an instant return of $4.50, which lowers your net cost per share to $9.74.


As explained above, share prices can fall almost 32%, from $14.24 to your net cost of $9.74, without any capital loss being incurred.

In addition, at your new cost basis of $9.74 per share, your annual dividend yield rises from 5% to 7.2%. Thus, while you have limited your capital gain upside, you have also significantly increased your dividend yield. This is an especially good strategy if you don’t think the underlying stock price will make large gains, or if you are very averse to risk and want to profit largely from dividends while creating a 32% hedge against falling share prices.


2. Adding Income Stream to Capital Gains


Another way to play covered calls is to set the strike price above the current price. You would do this if you expect share prices to appreciate moderately. By doing so, you profit from both a rise in share prices and the extra revenue from selling the options. Below is an example:


You anticipate that shares of Ford (NYSE: F), which currently trades at $15.28, will go up over the next 3 months.

You own shares at $15.28 each.

You sell a call options contract for $0.29 per share that will expire in 3 months with a strike price of $17 per share.


If share prices rise, you are allowed to keep the capital gains up to the $17 strike price, or $1.72 per share. In addition to this, you also receive 29 cents per share of income from selling the call options contract. It may not seem like much, but it has the ability to boost profits by 7.6% over the year (based on annualizing the 3 months call options contract price of 29 cents). Of course, your capital gains are also capped if share prices make a huge run beyond the $17 strike price.


3. Hedging Risk with Volatile Stocks

Risk goes way up when you hold shares in extremely volatile stocks. Buying call or put options for speculative trading can also be pricey since options derive much of their value from volatility. In such a case, you can buy the stock and sell call options that are “deep in the money” to protect against a significant decrease in stock price. “Deep in the money” refers to when the strike price is well below the current price. Thus, you have some protection against a downward fall, as well as a decent upside gain. Consider this example to see how it is carried out:


Solar stocks have high potential but a correspondingly high risk. One such stock, Energy Conversion Devices (NASDAQ: ENER), trades at $2.02 per share.


You acquire 100 shares at $2.02 per share.

You sell a call options contract with a $1.00 strike price for $1.27 per share and expires in 21 months.

Your effective cost basis per share is $0.75 per share.

Your maximum upside is $0.25 per share, or the difference between your net cost and the strike price.


How is this maximum upside calculated? Since your strike price is set at $1.00, you have essentially sold the rights on your stock above this amount. To put this another way, you will retain ownership up to $1.00, but if the price ends up above $1.00, the options will be exercised. Your potential reward is the difference between the $0.75 of net cost and the $1.00 of payment when the options are exercised at any amount above this. Thus, even if share prices fall to $1.00 (or a 50% drop from when you purchased it) and the rights are not exercised, you still made a 33% profit by turning 75 cents into one dollar. This is a great strategy when you’re invested in a stock that you believe has a high probability to suffer a significant decrease in price.


Final Word


Writing call options on stock you own is a powerful and versatile investing tool that, when properly wielded, can boost dividends, create an extra income stream, and hedge against a downside risk. However, just because a stock is optionable and you are able to write covered calls on it, doesn’t necessarily mean that you should do so. Always analyse stocks on an individual basis, and assess whether you want to trade it based on business fundamentals, risk factors, and potential reward.


Source: Kurtis Hemmerling