Picking the Best Stocks to Write Covered Calls

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Covered calls writing is the best options strategy for those investors who are looking for a way to generate income in neutral market conditions. It is a conservative, less risky, easy-to-understand and easy-to-trade strategy.

Those who are unaware of the covered call strategy, here is a brief. For every 100 shares that you already own for a certain stock, you can sell (write) someone the right to buy those shares at a predetermined price before a predetermined expiry date. For that, you get a certain amount of money on the spot, which is called a premium. However, remember, you are only selling the right to someone to buy your shares; you are not enforcing any obligation on someone to buy your shares.

Picking the Best Stocks to Write Covered CallsAt the expiration, if the stock surpasses the predetermined price (it is called the strike price), you will have to sell your shares to the buyer of your option contract. As said above, the buyers of your shares have the right; hence, if the buyers wish, they can exercise the contract and buy your shares. In case the stock fails to reach the strike price, which often happens, your option expires worthless, and you will retain the ownership of your shares.

While the strategy is pretty straightforward, it is not always easy to yield good returns consistently. Covered calls writing has two risks:

  • If the price of your stock, against which you have written covered calls, surges up, you will miss on the gains because the buyer will exercise the option and you will have to sell your shares at the strike price, which now is below the current market price.
  • If the price of your stock drops abruptly, the loss from holding your shares will exceed the gains from the premium income.

In the light of this, it is important to choose a good trade plan. Choosing stocks arbitrarily to write covered calls or choosing stocks only because they have a high premium will most likely lead to failure.

Below are two important aspects, for choosing the proper stocks on which you can write covered calls:

Pick stocks with a strong technical. To be successful with the covered call strategy, you do not need expert-level technical analysis skills; however, basic knowledge of technical analysis is helpful. Technical analysis shows how the stock will perform in the short term. Therefore, get some basic understanding of the technical analysis. Online tools and resources are available, so it would not be too difficult.

Pick stocks with pragmatic premiums. When writing covered calls for income, it is essential to pick technically healthy stocks with a good premium. Good premium does not mean high premium or low premium, but pragmatic premium. Option contracts with high premium are dangerous, as they tend to have high volatility. No matter how attractive the returns may seem, stocks with high premiums are unfit for the covered call strategy.

Writing covered calls is an excellent strategy to produce income in flat market conditions. Nonetheless, just because it is straightforward to trade does not mean it is easy to execute it consistently. Fortunately, there are resources available to help improve your returns through covered calls. For instance, check out the skilled advisers at Total Options. The advisers at Total Options specialise in covered calls Australia. They can give excellent ASX options advice that can help improve the returns through covered calls writing. Learn more about Total Options by visiting their site www.totaloptions.com.au

Covered Calls Australia – Generate Consistent Cash Flow

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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.

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

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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 www.totaloptions.com.au. 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

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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 http://totaloptions.com.au/

How Covered Calls are Beneficial

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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.

The Covered Call Stock Option Strategy

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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

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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

Option Trading Tips – Covered Calls

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Writing Covered Calls is a conservative strategy where you buy a stock that you would like to invest in and then write a call option against that stock.


This is a cash generating strategy that not only offers downside protection that you otherwise wouldn’t enjoy if you just bought the stock, but also gives you the ability to generate a consistent monthly income, for only minutes of your time.


However as with all option trading strategies, there are pitfalls that you will need to avoid if you are to be consistently profitable.


Here are a few tips that may help you write covered calls successfully.


Always check the fundamentals of the underlying stock and make sure that you would be happy to own even if options didn’t exist.


A great resource for viewing fundamental ‘ratings’ for stocks is at http://www.morningstar.com


Don’t enter a Covered Call trade just because the option premium looks attractive. Higher option premiums (10-15% or more) often mean that the stock is more volatile i.e. prone to huge price swings and therefore greater risk.


I personally target the larger, more liquid and stable companies with monthly call option premiums between the 3-6% range.


One of my personal favourites and a stock that I have had considerable success writing covered calls on over the years is Oracle (ORCL).


I’ve also had consistent success with Intel (INTC) and Nokia (NOK). At times the Nasdaq Tracking Unit (QQQQ) is also attractive (a 3% yield is the highest I’ve ever seen it though).


Don’t hold stocks at least 2 days either side of earnings announcements. Much of the time expectations of good and even great earnings are already priced into the stock and should the stock fall short of expectations or even worse disappoint, a virtual bloodbath can follow. I’ve experienced declines of 30-50% in just a few days by holding my covered call stocks over earnings announcements.


Don’t get me wrong, it can also be good time to be a stockholder if the earnings numbers are really great, but I’m a little more conservative and to me it’s just not worth the risk. You can always buy back in afterwards anyway!


Always take a look at stock charts when choosing a stock to write covered calls on. There are 3 general patterns that I look for:


1) A moderate uptrend.


2) A sideways trend.


However the most conservative/safe chart pattern for covered call writing (in my experience) appears after a stock has had a steep sell off and has begun to move sideways for a couple of months.


This is a type of ‘bottoming’ pattern where much of the downside risk has already been ‘sold’ out of the stock.


As covered call writers it’s always important to remember that our risk lies if the stock falls sharply, so we want to do our best to reduce the risk as best we can. This is just one way that I have found to be effective.


If you go to http://www.stockcharts.com and pull up the chart for the QQQQ during the early part of 2003, you’ll see this exact pattern. I successfully wrote covered calls on the QQQQ for about 4 months during this time before I allowed myself to be assigned and moved onto another opportunity.


There you have it. Hopefully these tips help you on your way to consistent profits and monthly cashflow writing covered calls.


Oh, it also goes without saying but I’ll say it anyway, “Don’t put all your eggs in one basket!”


For more information on how to write covered calls go to: http://www.callwriter.com


Happy option trading and investing!


Source: James Thomas


Covered Calls Generate More Income At Low Risk

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Covered calls refers to a low risk options strategy involving an investor owning call options as well as the asset underlying the options. It is probably the lowest risk options strategy that can be devised. The primary purpose is to generate income. The income is generated by selling the call option.


Selling call options opens up an investor to the risk of the options being exercised requiring the investor to supply the underlying shares. Under a covered call strategy, the investor already owns the underlying shares largely avoiding any negative consequences from this risk. The share ownership covers, or offsets the risk of, the call options.


Under the strategy the investor, by definition, holds a long position in both options and the underlying asset. If the price of the asset rises so that the owner of the options exercises the option and makes a call on the asset, the investor already owns the asset and simply transfers that ownership to the option owner. The investor receives the appreciated price for that asset. Naturally, the investor benefits to the extent that the price of the asset has appreciated.


The strategy is also known as a Buy Write strategy. The investor buys the underlying asset and then writes (or sells) the call options. The strategy is used when the investor has a short term neutral to negative view on the asset and for this reason hold the asset long and simultaneously holds a short call option position.


An example may help illustrate the strategy. An investor buys one hundred shares in AAA Company at one hundred dollars per share. The investor expects the price of these shares to remain flat or maybe even fall over the next few months.


Following the share purchase, our investor also sells ten thousand call options on XYZ shares at thirty cents for each option. The call options have a six dollar strike price and a two month expiry. This call option sale generates a three thousand dollar income for our investor.


Three outcomes are possible regarding the XYZ share price over the next two months. Firstly, it will stay constant within a band of five to six dollars. Secondly, it will decrease below five dollars. Thirdly, it will increase above six dollars.


In the first two scenarios, the share options expire worthless without their owner making a call on the shares. In both these cases, our investor continues to own the XYZ shares as well as generating a three thousand dollar income from the option sale.


In the third scenario, exercise of the call options is triggered. The investor is obligated to sell one hundred AAA shares. Total income from the share sale is ten thousand dollars. The investor also retains the one hundred option sale income.


In summary, covered calls offer a low risk strategy to generate additional income from share ownership. Selling (writing) call options does place a cap on the potential share price upside an investor can gain through share price appreciation. However, this is not a major consideration since the cap can be managed by the investor by choosing an option series with an appropriate strike price.


Source: Tim Leary

Using the Covered Call

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The covered call is so often the first type of strategy an option strategist tries due basically to many investors coming from a background where they have always owned stocks. The covered call is a way to derive income from the portfolio and/or lock in some profits, to a certain degree. However, before the covered call can be employed profitably many of its nuances and certain pitfalls need to be firmly understood.


Basically what the covered call entails is where the option strategist buys stock in increments of 100 shares and for every 100 shares sells a call option contract against it. When the option strategist actually sells the call, they are giving somebody else the right to buy the stock at a fixed price. The word covered comes from the fact the seller of the calls is not at risk if the stock climbs higher as opposed to someone who sells uncovered or naked calls and can lose an unlimited amount if the stock moves higher. With covered call writing this upside risk is eliminated because you will always be able to deliver the shares no matter how high the stock climbs.


However, there are indeed risks in the covered call strategy. The position only covers you if the stock climbs through the strike price you sold the call at but it does not protect you from the losses incurred from a large drop in the underlying stock price. The covered call lowers the cost basis of the stock just by the amount of premium received. Any drop below that new cost basis would show up as losses to the position. This risk factor needs to be clearly understood by anybody wanting to use the covered call strategy.


Covered call writer usually fall into two different camps with two distinctly different objectives. One such type is the strategist who wants to use the strategy to generate income against stock they plan to hold regardless. The other type of covered call writer employs the strategy for the sole objective of receiving high premiums. The more effective of the two covered call approaches is writing calls against stock you are willing to hold.


This income seeking approach allows the investor to receive a little downside hedge and then getting paid to sell the stock at a price they see favourable. Assuming it is fundamentally a superior stock and the

investor likes it then obviously they would be more apt to assume more downside risk. In essence, they would hold the stock whether options were available or not. This approach is like getting paid by the market to place a sell order limit on the stock.


Now the approach that just seeks out high premiums has many pitfalls and can be very dangerous. Typically traders just selecting on high premiums do not appreciate the true downside risk of the covered call strategy. Many times just selecting on high premium they do no further investigation on the quality of the issue or for that matter does not even know what they do. In addition, the issues that have these high premiums attached are often times very speculative issues prone to large price declines if things do no go exactly right.


It is far better and effective if the investor concentrates on the quality of the stock first before looking at premiums. If you select fundamentally superior stocks that you would want to own for at least the intermediate term then writing covered calls can be a very profitable strategy and lower your overall cost basis of the stock. However, if you are just seeking premium and ignore the inherent strength or weakness of the stock then this type of covered call writer may have to endure some market disasters with devastating drawdowns. The bottom line is if you choose to use the covered call then by all means do so effectively.


Happy Trading!


Source: Jeff Neal