Covered Call (Trading Plan)

Covered Call

Low Priced Stocks

Overview:  When selling a Call option on stock that you own, you are giving someone the right to purchase (100) shares from you at a specific price (strike price) on or before a certain date (expiration date).  In return for this right, the option buyer pays you a premium that is yours to keep regardless of whether the option is exercised or not.  Since you actually own stock when writing Covered Calls, you are still subject to losses from declines in the stock price.  You also give up any potential upside profits on the stock above the strike price of the option you sold since you are obligated to sell your stock at the strike price if the stock closes above that price upon expiration.  The goal of the Covered Call writer is to generate 5%-15% returns or more on a monthly basis. 

     

Strategy	Outlook	Risk	Reward
Buy (100) shares	Bullish	Price Paid	Unlimited
Sell a Call (OTM)	Bullish	Naked Call	Limited

Step #1:  Identifying Stocks.  Use “FINVIZ.com” which will help you find quality stocks on which to sell Call options for a good premium.  Select stocks trading under $30.00.

Step #2:  Review Charts.  Determine trend on weekly chart first, then look for trades on the daily chart only in that direction.  When the weekly trend is up, it allows you to trade only from the long side.

Step #3:  Strike Price (short Call).  A good strategy is to sell out-of-the-money (strike price > stock price) Calls with about 30-45 days until expiration.  This will give the stock more room to rise and produce a profit on the sale of the stock.

Step #4:  Return Assigned.  The return if assigned should be at least 5.0% or more.  This is the most important screen since income is the primary objective of Covered Calls and getting assigned usually produces the best returns.

Step #5:  Implied Volatility.  Look for Call options that have a high implied volatility.  This will make the Call more attractive to sell and increase your rate of return.  High implied volatility also increases risk.

Step #6:  Open Interest.  Be sure the open interest (number of existing contracts) for the option you want to sell is at least 500, preferably 1,000 contracts.  The higher the OI the more liquid the options.

Step #7:  Breakeven.  The only way to lose money is if the price of the underlying stock falls below the breakeven point.  (Stock Price – Premium Received = Breakeven)  Consider selling the stock if it drops below the breakeven point.  Buy back the Call option then sell the underlying stock.

First Majestic Silver Corp (AG) $24.94

Buy (100) shares @ $24.94       $2,494.00  Debit

Sell (1) Aug 11 25 C @ $1.69     $   160.00  Credit

Net Debit or (Breakeven)          $2,334.00  Stock would have to drop below $23.34 to suffer a loss.

Return If Assigned:  7.1%  (27 days)