![]() ![]() If you’re a swing trader – which I define as someone who would like to get paid either this Friday or next Friday – then place a stop loss on the entire position (stock and call) a technical level or your break-even price. ![]() After you get into a Covered Call, you still need to manage the position. You should have a cash flow expectation of 3% or higher in Return on Investment (ROI). If you build a rule for days instead of expiration month then look for 15 to 75 days of time, with the preference between 30-60 days of time until expiration. The expiration should be between 1-2 months of time. I suggest starting with calls as close to. Second, when selling the call use Out-of-the-Money calls in the delta range between. Establish a range of price that reflects an affordable range. If you have to put your entire account on 100 shares of stock it may be unwise to do so. First, look for companies that are affordable. When we talk about trading rules, it’s important to be specific enough to make sure that traders can execute the trade consistently but have a little wiggle room so that you can adjust for each stock and their corresponding option chain. If you want to get back into that stock again, then after expiration you will have to buy that stock back. So what happens if the stock goes up beyond your strike and expires in the money? The market will take your stock and you will have generated your maximum profit potential. When you trade a Covered Call, you take on the obligation to sell your stock at the strike you sell. That’s the power of cash-flow, and remember it’s from a market that you don’t need to find tenants to pay the rents. If you do this each month for a year you have generated $60000 in credits on a stock that represents $50000 of value. With 1000 shares you get to sell 10 of those calls for $5000 of total cash-flow. If you have 1000 shares of XYZ stock $50 per share you can sell calls against that stock for $500 per contract each month. Here is an example to help us understand the point. The market is so large and liquid that you can simply open your brokerage account every month and collect your credit. If you own a stock you own an asset just like when you own a house. If you can find the right people to move into your house that won’t trash it and will pay the rents every month – that’s great! If you happen to have some of the other kind of tenants that aren’t consistent with the rent and leave the house in shambles – well that can be a problem. You have the potential to have a nice cash-flow machine. But, instead of selling the house you live in you decide to turn it into a rental to generate some consistent income. Imagine you decide to upgrade from your current home, and you find your dream home to move into. ![]() It’s possible some of you have owned property that you have rented out for income. One example that is frequently used to help people understand the power of covered calls comes from the Real Estate market. If you don’t own any stock, then you will need to scan or locate a company that you want to purchase that also fits your money management rules. If you currently own stock, then you already have an asset that you can sell calls against to generate income and a profit. Let’s start with the stock portion of the Covered Call strategy. We will examine both mind-sets and techniques. Investors tend to set it and forget it and come back occasionally to adjust their positions or check their stocks. Traders tend to focus on shorter-term expirations and do much more rolling of the call and adjusting on the trade in general than investors. The more you trade – you may want to focus on the basics and put your time into perfecting them.Ĭovered Calls are used by both traders and investors alike. But don’t be mistaken, just because the Covered Call is a simple strategy that doesn’t mean that advanced or experienced traders don’t use it. There are all kinds of complex strategies that involve multiple legs and an intermediate or advanced understanding of options that you can learn after you’ve mastered the basics. When you’re new to options it is wise to start simple. In this series, we will examine some of the core and classically used options strategies. The traditional approach to this strategy is to sell the call out of the money. The Covered Call is a classic options strategy where a trader buys stock and then sells a call option on that same stock. Depending on your portfolio objectives, you will want to use certain kinds of options strategies. ![]()
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