You would normally think of covered call options trading as something you would be inclined to do in a bull market. You look for a stock that is on the rise, or one that you expect to at least stay in a tight trading range in the short term, sell covered calls above the price you paid for the shares, collect call option premium and possibly also make a gain on sale of the shares if called away at expiry date.

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the leading  authorities online.

This is a more aggressive approach and a great way to do covered call options trading when the market is generally bullish, or you have good reason to believe the stock you have chosen is going up.

But can you still consider covered call options trading when the market is in a primary downtrend? Yes you can! If your view of the stock is, that it is more likely to fall before expiry date, you can still make a profit. You take the conservative approach and this is how you do it.

If you’re doing a buy-write, first take note of the chart patterns and observe the highs and lows as the stock trends downwards. Try to purchase the stock as close as possible to the next “low” in the trend. This would usually be a support line, or a similar distance from the previous trough up to the peak before it.

So you have now bought the stock. Next thing to do is sell covered calls at a strike price that is UNDER the current market price of the underlying stock. These are called “in-the-money” call options. They will contain some “time value” but also some “intrinsic value” in the option premium. As a consequence, the premium you receive will be substantially higher than if you had sold out-of-the-money calls and will provide you with greater downside protection should the stock fall further.

You’re not in a hurry when you’re selling covered calls this way. You have until the near month expiry date to decide what to do next.

Let’s say that as expected, the stock rises in a short term pullback over the next week or so, before continuing the downtrend. At this point there is nothing to do. Your position is still in profit, even though it is smaller than if you had sold out-of-the-money calls. The higher the stock rises, the further in-the-money the sold call options will go. There will be more “intrinsic value” than “time value” now, as the delta increases.

If the stock reverses and unexpectedly continues north until expiry date, your shares will be called away at the lower strike price. You will make a loss on the shares but this will be neutralised by the higher call premium you received. Your profit should be only the amount of “time value” above the “intrinsic value” in the call options at the time you sold them.

But in a falling market the stock is likely to reverse after the pullback and continue south. If the stock falls rapidly, consider buying back the call options and selling more call options at a lower strike price to increase the yield. You will make a profit on the options you buy back because their value will have decreased and the delta will be working for you here. If you now sell more in-the-money call options at the lower strike, this premium will contain some time value, plus provide you with further downside protection for the shares you have purchased.

You can do this several times a month if your timing is right. You can also consider selling covered calls for the next month out as part of your strategy.

Here’s an example:

You have bought shares and sold in-the-money call options over them for a premium of $1.50 per share. In two weeks, the share price drops and the value of those call options is now only $0.25 per share. You buy them back and sell covered calls on the same stock at either a lower strike price or for the following month expiry, for around $1.50 again. You have made a profit of $1.25 on the first lot of sold calls, plus received another $1.50 on the second lot – a total of $2.75 per share which you can use to either protect against further falls or contribute toward your overall profit. Numbers like this would apply to lower value shares where the option premiums are not so high – you just increase the size as the share value increases.

But covered call options trading on stocks priced at less than $30 per share creates a higher percentage covered call option premium yield than on higher priced stocks. So this is a recommended part of your strategy.

Making a regular income from covered call options trading is just as possible in a falling market as it is in a rising one. It’s simply about adapting your strategy to current market conditions.

Investors who hold individual securities will have certainly noticed that periods of continued strength normally end with a period of weakness, and following the weakness the cycle starts again. An ideal options strategy would be to sell covered calls in periods of strength and either let them expire or buy them back in periods of weakness.

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the leading  authorities online.

Selling covered calls when a security is peaking is not a new strategy. It certainly is a popular one, mostly due to the fact that investor can maintain control of the underlying security and continue collecting dividends (if applicable) and, in some cases, the option expires worthless or it is bought back at a lower price. Even if that option is exercised, the investor often gets out of a position that they should have gotten out of anyway but stayed invested because they wanted to see more and more growth (alternately known as greed).

Measuring Strength

One way to measure whether a security is trading on strength or weakness is by using Bollinger Bands or by measuring a security’s price against is moving average.

When shares are trading on strength and seem to deviate by a large margin from its mean (either it is trading at or above the upper Bollinger band or well above its moving average), the common belief is that the security will start trading on weakness. This means a pullback of some type is due and the security is expect to drop in price, at least for the short-term until the Bollinger bands and/or moving average adapts to the new trading range.

What Call Options to Sell/Write

The best strategy when it comes to writing covered call options is to write them slightly out of the money, particularly after a period of aggressive price appreciation. This serves two purposes. One, it allows for additional profit should the security continue to appreciate. And two, it maximizes the premium of heightened volatility.

Since volatility plays a tangible role in options pricing, the more the security deviates from its mean, the more costly the option will become. Not only will the investor benefit from continued price appreciation, but will earn a greater premium on the written option.

Common Risks
Risks to covered call options is that the underlying security drops so much in value that the premium income does not replace the loss (which could also happen without writing the call). Another risk is the opportunity risk associated with the security shooting past the strike price so far that the investor misses out on those gains because the option will be “called.”

Regardless of the risks above (a normal one as well as an opportunity risk) writing covered call options allows the investor to capitalize on abnormal price appreciation in their portfolio. As well, this is a fairly straightforward practice and, while common, is used by millions of investors every day.

Covered Calls is a name for an option strategy that is flexible enough so that it can be adapted to different market conditions. It is important that you first decide what type of covered call strategy best fits your personal risk profile. Is your focus simply earning extra income on stocks you already own, or protecting the value of your shares? What you are about to read will show you how.

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the leading  authorities online.

A Stock Owner Who Wants More Than Just Dividend Income

If this is you, then you’re a long term stock holder. You’ve probably purchased a stock some time ago and hopefully, it’s worth more today than when you bought it. Perhaps you have an IRA or superannuation fund and would like to see a greater return on investment? Or maybe you just believe this stock is a good long term investment and want more?

In that case, you need to be aware of a few things. When you sell call options, in return for the premium you receive, you’re exposing yourself to the risk of the stock being called away from you – i.e. you may have to sell it at the agreed ‘strike price’ for the options you have sold. If you’ve held the stock for a while, there may be capital gains tax implications to consider. You would want to ensure your strike price is greater than the price you originally bought the stock for, otherwise you could make a capital loss. So your decision to implement this covered call strategy will depend on where your stock is today, in relation to when you purchased it.

If today’s price is above your purchase price, then this covered call strategy could be a nice way to bring extra income over dividends. The best strategy here, would be to sell call options for the next month out. The reason for this, is that during the last 30 days of an option contract’s life, the “time value” in out-of-the-money options declines at an exponential rate. So if you sell call options at a strike price of say, $2.50 above the current market price and within the next month, the underlying stock either goes nowhere, or declines, you get to keep the option premium, or buy it back (to protect yourself from an unexpected price rise) within a few days of expiry, for next to nothing. You have a made a profit from selling high and buying back low, or letting it expire worthless, as the case may be.

You may not be able to do this every month if you want to keep your stock. It will depend on where the current market price is in relation to your original purchase price. You may be prepared to let the stock go, if called away, providing it is above your purchase price. That’s your decision. Either way, your one simple fundamental rule if you’re an investor and not a trader, is to wait until you can sell call options at a strike price above your original purchase price. That way, you can’t lose.

Another use of covered calls for the stock owner, is to provide a form of insurance over your shares. Let’s say you own 500 XYZ shares which you purchased for $15 a year ago and the current market price is now $20. You want to hedge your investment in the event of XYZ falling back to $15 or less. So you sell 5 “deep-in-the-money” near month call option contracts on XYZ at a strike price of $15 and receive $5.50 x 500 in premium = $2,750 credited to your account. At the same time, you purchase 5 near month “out-of-the-money” $15 put option contracts on the share and pay $0.25 x 500 = $125. Your net income is now $2,625 less brokerage.

Should the share price fall below $15 before expiry, your put options allow you to sell them for that price, thus protecting you from a catastrophic collapse due to some bad news. You have covered the cost of these put options with the extra $0.50 above the intrinsic value in the $5 ITM call options. If the share price is close to $15 near expiry date and you are nervous about further falls, you may wish to consider selling the next month out deep-in-the-money call options and purchasing OTM put options at the same strike price of say $12.50. Again, you should receive enough premium from the ‘deep ITM’ call options to cover the cost of the put options plus any potential further capital loss on falling share prices.

The downside of this covered call strategy, is that since you have written deep ITM call contracts, if the stock price is above $15 at expiry date, you are likely going to be called to sell your shares at $15. But you have already received the extra $5 in premium earlier so there is no loss. But if the current market value of the shares has risen to say $24 by now, you have foregone the potential gain on the shares you would have otherwise made. But it’s a great choice in a bear market or at what you believe to be the top of an uptrend.

You would normally think of covered call options trading as something you would be inclined to do in a bull market. You look for a stock that is on the rise, or one that you expect to at least stay in a tight trading range in the short term, sell covered calls above the price you paid for the shares, collect call option premium and possibly also make a gain on sale of the shares if called away at expiry date.

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the leading  authorities online.

This is a more aggressive approach and a great way to do covered call options trading when the market is generally bullish, or you have good reason to believe the stock you have chosen is going up.

But can you still consider covered call options trading when the market is in a primary downtrend? Yes you can! If your view of the stock is, that it is more likely to fall before expiry date, you can still make a profit. You take the conservative approach and this is how you do it.

If you’re doing a buy-write, first take note of the chart patterns and observe the highs and lows as the stock trends downwards. Try to purchase the stock as close as possible to the next “low” in the trend. This would usually be a support line, or a similar distance from the previous trough up to the peak before it.

So you have now bought the stock. Next thing to do is sell covered calls at a strike price that is UNDER the current market price of the underlying stock. These are called “in-the-money” call options. They will contain some “time value” but also some “intrinsic value” in the option premium. As a consequence, the premium you receive will be substantially higher than if you had sold out-of-the-money calls and will provide you with greater downside protection should the stock fall further.

You’re not in a hurry when you’re selling covered calls this way. You have until the near month expiry date to decide what to do next.

Let’s say that as expected, the stock rises in a short term pullback over the next week or so, before continuing the downtrend. At this point there is nothing to do. Your position is still in profit, even though it is smaller than if you had sold out-of-the-money calls. The higher the stock rises, the further in-the-money the sold call options will go. There will be more “intrinsic value” than “time value” now, as the delta increases.

If the stock reverses and unexpectedly continues north until expiry date, your shares will be called away at the lower strike price. You will make a loss on the shares but this will be neutralised by the higher call premium you received. Your profit should be only the amount of “time value” above the “intrinsic value” in the call options at the time you sold them.

But in a falling market the stock is likely to reverse after the pullback and continue south. If the stock falls rapidly, consider buying back the call options and selling more call options at a lower strike price to increase the yield. You will make a profit on the options you buy back because their value will have decreased and the delta will be working for you here. If you now sell more in-the-money call options at the lower strike, this premium will contain some time value, plus provide you with further downside protection for the shares you have purchased.

You can do this several times a month if your timing is right. You can also consider selling covered calls for the next month out as part of your strategy.

Here’s an example:

You have bought shares and sold in-the-money call options over them for a premium of $1.50 per share. In two weeks, the share price drops and the value of those call options is now only $0.25 per share. You buy them back and sell covered calls on the same stock at either a lower strike price or for the following month expiry, for around $1.50 again. You have made a profit of $1.25 on the first lot of sold calls, plus received another $1.50 on the second lot – a total of $2.75 per share which you can use to either protect against further falls or contribute toward your overall profit. Numbers like this would apply to lower value shares where the option premiums are not so high – you just increase the size as the share value increases.

But covered call options trading on stocks priced at less than $30 per share creates a higher percentage covered call option premium yield than on higher priced stocks. So this is a recommended part of your strategy.

Making a regular income from covered call options trading is just as possible in a falling market as it is in a rising one. It’s simply about adapting your strategy to current market conditions.

You would normally think of covered call options trading as something you would be inclined to do in a bull market. You look for a stock that is on the rise, or one that you expect to at least stay in a tight trading range in the short term, sell covered calls above the price you paid for the shares, collect call option premium and possibly also make a gain on sale of the shares if called away at expiry date.

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the leading  authorities online.

This is a more aggressive approach and a great way to do covered call options trading when the market is generally bullish, or you have good reason to believe the stock you have chosen is going up.

But can you still consider covered call options trading when the market is in a primary downtrend? Yes you can! If your view of the stock is, that it is more likely to fall before expiry date, you can still make a profit. You take the conservative approach and this is how you do it.

If you’re doing a buy-write, first take note of the chart patterns and observe the highs and lows as the stock trends downwards. Try to purchase the stock as close as possible to the next “low” in the trend. This would usually be a support line, or a similar distance from the previous trough up to the peak before it.

So you have now bought the stock. Next thing to do is sell covered calls at a strike price that is UNDER the current market price of the underlying stock. These are called “in-the-money” call options. They will contain some “time value” but also some “intrinsic value” in the option premium. As a consequence, the premium you receive will be substantially higher than if you had sold out-of-the-money calls and will provide you with greater downside protection should the stock fall further.

You’re not in a hurry when you’re selling covered calls this way. You have until the near month expiry date to decide what to do next.

Let’s say that as expected, the stock rises in a short term pullback over the next week or so, before continuing the downtrend. At this point there is nothing to do. Your position is still in profit, even though it is smaller than if you had sold out-of-the-money calls. The higher the stock rises, the further in-the-money the sold call options will go. There will be more “intrinsic value” than “time value” now, as the delta increases.

If the stock reverses and unexpectedly continues north until expiry date, your shares will be called away at the lower strike price. You will make a loss on the shares but this will be neutralised by the higher call premium you received. Your profit should be only the amount of “time value” above the “intrinsic value” in the call options at the time you sold them.

But in a falling market the stock is likely to reverse after the pullback and continue south. If the stock falls rapidly, consider buying back the call options and selling more call options at a lower strike price to increase the yield. You will make a profit on the options you buy back because their value will have decreased and the delta will be working for you here. If you now sell more in-the-money call options at the lower strike, this premium will contain some time value, plus provide you with further downside protection for the shares you have purchased.

You can do this several times a month if your timing is right. You can also consider selling covered calls for the next month out as part of your strategy.

Here’s an example:

You have bought shares and sold in-the-money call options over them for a premium of $1.50 per share. In two weeks, the share price drops and the value of those call options is now only $0.25 per share. You buy them back and sell covered calls on the same stock at either a lower strike price or for the following month expiry, for around $1.50 again. You have made a profit of $1.25 on the first lot of sold calls, plus received another $1.50 on the second lot – a total of $2.75 per share which you can use to either protect against further falls or contribute toward your overall profit. Numbers like this would apply to lower value shares where the option premiums are not so high – you just increase the size as the share value increases.

But covered call options trading on stocks priced at less than $30 per share creates a higher percentage covered call option premium yield than on higher priced stocks. So this is a recommended part of your strategy.

Making a regular income from covered call options trading is just as possible in a falling market as it is in a rising one. It’s simply about adapting your strategy to current market conditions.

Investors who hold individual securities will have certainly noticed that periods of continued strength normally end with a period of weakness, and following the weakness the cycle starts again. An ideal options strategy would be to sell covered calls in periods of strength and either let them expire or buy them back in periods of weakness.

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the best leading website authorities online.

Selling covered calls when a security is peaking is not a new strategy. It certainly is a popular one, mostly due to the fact that investor can maintain control of the underlying security and continue collecting dividends (if applicable) and, in some cases, the option expires worthless or it is bought back at a lower price. Even if that option is exercised, the investor often gets out of a position that they should have gotten out of anyway but stayed invested because they wanted to see more and more growth (alternately known as greed).

Measuring Strength

One way to measure whether a security is trading on strength or weakness is by using Bollinger Bands or by measuring a security’s price against is moving average.

When shares are trading on strength and seem to deviate by a large margin from its mean (either it is trading at or above the upper Bollinger band or well above its moving average), the common belief is that the security will start trading on weakness. This means a pullback of some type is due and the security is expect to drop in price, at least for the short-term until the Bollinger bands and/or moving average adapts to the new trading range.

What Call Options to Sell/Write

The best strategy when it comes to writing covered call options is to write them slightly out of the money, particularly after a period of aggressive price appreciation. This serves two purposes. One, it allows for additional profit should the security continue to appreciate. And two, it maximizes the premium of heightened volatility.

Since volatility plays a tangible role in options pricing, the more the security deviates from its mean, the more costly the option will become. Not only will the investor benefit from continued price appreciation, but will earn a greater premium on the written option.

Common Risks
Risks to covered call options is that the underlying security drops so much in value that the premium income does not replace the loss (which could also happen without writing the call). Another risk is the opportunity risk associated with the security shooting past the strike price so far that the investor misses out on those gains because the option will be “called.”

Regardless of the risks above (a normal one as well as an opportunity risk) writing covered call options allows the investor to capitalize on abnormal price appreciation in their portfolio. As well, this is a fairly straightforward practice and, while common, is used by millions of investors every day.

Covered call writing strategies are ideally suited to stocks which have good fundamentals and are also on the rise. Let’s assume you have adopted a strategy to write “out of the money” call options immediately after purchasing multiples of 100 of any U.S. ‘optionable’ stocks. There are 3 possible outcomes:

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the best leading website authorities online.

1. The stock remains below the strike price but doesn’t fall significantly, by option expiration date

- AVERAGE OUTCOME… you keep the option premium and possibly make some gain on the shares if you choose to sell them

2. The stock is above the strike price at option expiration date

- BEST OUTCOME… you keep the option premium PLUS enjoy a gain on the shares if and when you are called to sell them

3. The stock falls significantly below the strike price by expiration date

- WORST OUTCOME… you keep the option premium and use it to offset the loss on the shares

It will be obvious from the above, that our most favourable scenario would be to sell call options at a strike price above our purchase price for the stock, then enjoy the satisfaction of selling the shares for a gain within the near month expiry period of the options. Then just do it all again….

So let’s focus on picking U.S. stocks that are most likely to either rise or remain in a tight trading range in the near term.

To do this, we need to be aware of a couple of positive technical indicators. The first is the 50 day Exponential Moving Average (EMA) in connection with the 200 day EMA. When the 50 has crossed above the 200, this is generally considered by the charting world to be a sign that the stock is experiencing a “bull run” trend and tells us that the covered call writing strategy we should be interested in, involves writing “out-of-the-money”… “at-the-money” or slightly “in-the-money” calls – depending on the percentage yield each alternative offers us.

• We want a call option premium which is at least 10 percent of the current market value of the underlying stock. If we can get this using out-of-the-money options we will be happy, otherwise look at ‘at-the-money’ etc.
• We prefer options with a higher than normal Implied Volatility, but not at the expense of positive stock fundamentals.

In order to achieve this quickly, a good covered call screener would help to bring up relevant data. The “options dragon” at OptionsXpress is an excellent free tool in this regard – but you have to be using them as your broker to access it.

Having located stocks where the 50EMA has crossed above the 200EMA, you then draw trendlines over the top and bottom of the ‘highs’ and ‘lows’ to get a feel for where your stock is in its trading cycle. This will help you with timing of your entry. If the 50EMA has crossed below the 200EMA, you should consider more conservative ‘bear market’ covered call writing strategies. We will outline these later. You should also look at the RSI technical indicator and determine whether the stock is near the upper (70) or lower (30) area. If above 70 it may be “overbought” and you should stay out. But if near the 30 “oversold” level this is a good indicator of future positive movement.

But back to rising stocks… we want to stack the odds in our favour for a near term positive stock movements even more. A great tool to use is the Investor’s Business Daily service. It is limited to the USA stock market and although there is a monthly membership fee, the analysis they provide will reward you ten times the cost.

This is what you do – membership with IBD will allow you to use their IBD Power Tools to scan the entire U.S. market for stocks with an ‘Earnings Per Share’ in the top 25 percent of all stocks trading on U.S. exchanges. You include in your search criteria, a 12 month Relative-Strength Ranking in the top 25 percent (not to be confused with the RSI indicator here – it’s IBD’s own terminology). These two important fundamental performance indicators, together with the technical indicators mentioned above, will ensure confidence in your covered call writing strategy.

Having established all positive indicators for your chosen stock to either rise or remain neutral during the near month option expiry cycle, you then check that the premium offered will meet your yield criteria and if acceptable, place the ‘buy-write’ trade. There is great advantage in using only ‘near month’ option expiry dates over ‘later month’ ones. During the last 30 days of an option’s life, it’s ‘time value’ declines at an exponential rate. Since you are a “seller” not a “buyer” of call options, you want to take advantage of this.

If all the above features come into play and you’ve assessed the risk vs rewards in a businesslike manner, there is but one thing left to do….. GO FOR IT!

You would normally think of covered call options trading as something you would be inclined to do in a bull market. You look for a stock that is on the rise, or one that you expect to at least stay in a tight trading range in the short term, sell covered calls above the price you paid for the shares, collect call option premium and possibly also make a gain on sale of the shares if called away at expiry date.

Visit our site to know more about Covered Calls and quickly learn all about Covered Calls from one of the leading  authorities online.

This is a more aggressive approach and a great way to do covered call options trading when the market is generally bullish, or you have good reason to believe the stock you have chosen is going up.

But can you still consider covered call options trading when the market is in a primary downtrend? Yes you can! If your view of the stock is, that it is more likely to fall before expiry date, you can still make a profit. You take the conservative approach and this is how you do it.

If you’re doing a buy-write, first take note of the chart patterns and observe the highs and lows as the stock trends downwards. Try to purchase the stock as close as possible to the next “low” in the trend. This would usually be a support line, or a similar distance from the previous trough up to the peak before it.

So you have now bought the stock. Next thing to do is sell covered calls at a strike price that is UNDER the current market price of the underlying stock. These are called “in-the-money” call options. They will contain some “time value” but also some “intrinsic value” in the option premium. As a consequence, the premium you receive will be substantially higher than if you had sold out-of-the-money calls and will provide you with greater downside protection should the stock fall further.

You’re not in a hurry when you’re selling covered calls this way. You have until the near month expiry date to decide what to do next.

Let’s say that as expected, the stock rises in a short term pullback over the next week or so, before continuing the downtrend. At this point there is nothing to do. Your position is still in profit, even though it is smaller than if you had sold out-of-the-money calls. The higher the stock rises, the further in-the-money the sold call options will go. There will be more “intrinsic value” than “time value” now, as the delta increases.

If the stock reverses and unexpectedly continues north until expiry date, your shares will be called away at the lower strike price. You will make a loss on the shares but this will be neutralised by the higher call premium you received. Your profit should be only the amount of “time value” above the “intrinsic value” in the call options at the time you sold them.

But in a falling market the stock is likely to reverse after the pullback and continue south. If the stock falls rapidly, consider buying back the call options and selling more call options at a lower strike price to increase the yield. You will make a profit on the options you buy back because their value will have decreased and the delta will be working for you here. If you now sell more in-the-money call options at the lower strike, this premium will contain some time value, plus provide you with further downside protection for the shares you have purchased.

You can do this several times a month if your timing is right. You can also consider selling covered calls for the next month out as part of your strategy.

Here’s an example:

You have bought shares and sold in-the-money call options over them for a premium of $1.50 per share. In two weeks, the share price drops and the value of those call options is now only $0.25 per share. You buy them back and sell covered calls on the same stock at either a lower strike price or for the following month expiry, for around $1.50 again. You have made a profit of $1.25 on the first lot of sold calls, plus received another $1.50 on the second lot – a total of $2.75 per share which you can use to either protect against further falls or contribute toward your overall profit. Numbers like this would apply to lower value shares where the option premiums are not so high – you just increase the size as the share value increases.

But covered call options trading on stocks priced at less than $30 per share creates a higher percentage covered call option premium yield than on higher priced stocks. So this is a recommended part of your strategy.

Making a regular income from covered call options trading is just as possible in a falling market as it is in a rising one. It’s simply about adapting your strategy to current market conditions.