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Selling Calls is one of my favorite strategies I use to recoup my initial investment, dollar cost average into more shares, and to generate a steady cash flow. My personal goal is to create a portfolio that enables me to generate a passive income monthly once I decide to stop growing my portfolio.
Imagine being able to sell 10 contracts a week that generate $50
10 contracts x $50 weekly premium = $500/week, $2,000/month, $24,000/year
30 contracts x $40 weekly premium = $1,200/week, $4,800/month, $57,600/year
20 contracts x $80 monthly premium = $1,600/month, $19,200/year
While nothing is guaranteed and the premiums involved may rise and fall depending on price action, this is one of several strategies I employ to grow my portfolio. One thing I look for in the securities I select for my CC's are:
ROI over the past ten years UVXY has shown a 99% loss over the past 10 years
Split History - TQQQ has split every 2-3 years on a healthy ROI. This means that they continually perform well over time and have a tendency to split giving me more shares (more contracts). Companies that continually split shows great success in the price rising.
Dividends - This is not a primary reason for me selecting a position, but in a good security you could reap incremental benefits over time.
USOI - 56% dividend yield ($5 security that typically returns $3/year; two years could recoup your entire investment or allow you to continually repurchase additional shares) - I do not endorse or encourage this dividend stock.
AAPL - 0.67% (0.90/share); my friend has 1000 shares of AAPL that pays them $900/year ($90 for every 100 shares)
This strategy of selling calls can be viewed in multiple ways
Is this a 10 year plan with a good stock that is currently showing growth and vision for the future? If so, then we can look to roll any CC's that may take our shares away.
Are we over one year in holding our shares? Capital gains tax is only 10% after holding our shares for one year versus short term gains which is based upon our tax bracket.
Do we want to be fluid so that we are not tied to the stock for years? If your intent is to take advantage of a current market trend and do not care about the stock then allow your call to expire in the money and start a cash secured put or wait for a position in something more lucrative.
Covered Calls Tutorial
Covered Calls Tutorial
Great strategy if:
You have the cash to purchase 100 shares
You like the security and believe it will continue to appreciate
If the company pays dividends
Benefits and Drawbacks of Selling a Call
Benefits and Drawbacks of Selling a Call
Similar to selling a PUT, when we Sell a CALL we collect a Premium
This strategy is best used in a Bullish or Neutral Market
Allows us to collect higher premiums as price rises
If price rises above our strike, we keep our premium and sell our shares at the strike price for a profit (assuming your strike price is greater than your purchase price)
Selling a contract gives the buyer the right to buy our 100 shares at the selected strike price; this can be executed at any time by the buyer
In order to Sell a CALL we must have one of the following conditions:
Own 100 shares
Own a Long Call (LEAP or a CALL that has an expiration in the future)
This strategy is best done with:
Strong reliable stocks (front runners in their industry, innovative, consistent)
Stocks we intend to hold forever to collect dividends that reduce our cost basis over time
Stocks that do not have wide swings (ATR) that could ruin our hold strategy
Benefits of Selling CALLS
Collect a Premium for holding your shares
Your shares may also pay dividends which allows you to collect while taking premiums
Locks us into a higher strike price that would make us a profit . See example.
Buy for $100/share, but sell a CALL at a strike of $130
If the stock is $130+, we would sell our 100 shares at $130/each for a profit of $30/share
We keep the premium and our shares if the price stays below the strike price
Drawbacks
If the stock price rises past our strike we would have to sell our shares
e.g. our strike is $100 and the share price is $105
If we allow our contract to expire or the buyer decides to assign early we would have to sell our shares at the agreed upon price even if the share price is higher
e.g. our strike is $100 and the share price is $105, we only get $100/share
Strike is $100 and the share price is $150, we only get $100/share
In these cases, we would roll our calls to avoid losing out on the gains
While we collect our premiums for price dropping, our share price is dropping and our long position (stock) is falling and we are losing value.
e.g. Cost is $100, price drops to $90, we have an unrealized loss of $1000
$100 - $90 = $10; $10 x 100 shares = $1000
Selecting a Strike
Selecting a Strike
Selecting an Expiration Date
28-60 days (1-2 months); I have heard of people even using 100 days
For a trader looking for less management, 60 days is better
For cash flow, 28 days is better and offers the ability to adjust based upon market movements monthly
Weeklies offers higher premiums (based on similar deltas) and allows you to capitalize on theta decay (higher theta for a shorter time frame)
Shorter time frames have a higher theta (time decay) which can help your position
Sometimes the weekly expirations are not exactly 28 or 60. Choose the closest based on your preference.
Be sure to make your strike selections based on your DTE time frame
60 days, select weekly and monthly to find strikes that fit the time frame
30 days, select daily and weekly
Weekly, select hourly and daily
The farther DTE is from expiration, allows you to select a higher strike price for a higher premium. See Below.
The left picture is 27 DTE, 40 delta, strike price of 345
The right picture is 76 DTE, 40 delta would be a strike price of 350
While you are able to get higher strikes for a higher premium, those who are looking for greater returns can do weeklies that offer greater returns vs buying a one month out option
Weeklies does take more time, effort, and can be subject to huge swings that force you to roll or your call to be exercised sooner than you would like, but that is something you will learn to weigh the amount of time you spend to the ROI you require.
27 DTE
76 DTE (You may also choose the previous date of 48 days instead)
Always look to Sell Calls when:
Implied Volatility (IV) is higher than usual
Market Open, price action is high, and sometimes near market close
When IV is high, premiums are higher (more money to collect)
Selecting a Strike
Use the call closest to 40 delta (40% probability of closing in the money).
For example, if you have a strike with a delta of .38 and .46 you would use the .38.
Traders who are trying to maximize cash flow would use a delta rule with the highest extrinsic value
Extrinsic value has time and volatility decay
This allows you to capture more of your premium quicker
You may also choose a more conservative approach with the 30 or 15 delta which is recommended for less management. You make less in premiums, but you are more likely to profit and avoiding rolling your call.
For a more aggressive position, if you are at a hard resistance and price is showing weakness, you can select the 50 Delta or higher to collect a bigger premium on the drop (expert level)
Remember, delta represents the probability of it being in the money
30 Delta or 15 Delta
30 Delta or 15 Delta
30 Delta
Select a Strike Price (SP) with a DELTA of 0.30 (30% chance of reaching the SP) or lower
Requires less management and less likely to hit. If there is no 30 Delta, select the Delta closest without going over.
15 Delta
The 15 Delta provides the most conservative approach with lower premiums as well.
If you have less time to trade or want something easy to manage your position
In general, the 15 Delta will net you half or less of the premium you would receive from the 30 Delta on average
Final Thoughts
Final Thoughts
Understanding your monthly or breaking down your weekly target can help you to hone in on the right strikes and higher premium returns
You may choose a higher percentage, but that means each option could be subject to liquidating if the price rises and closes above our strike price
Use Average True Range to select a SP out of the range. ATR represents the average daily movement of a stock.
Using Resistance to select a SP above. Find key resistance areas where it is likely to fall. (BEST METHOD using higher time frames to select your SP)
When you are first starting out in covered calls the idea of making more money to create additional positions is intriguing. As you acquire more positions to create covered call positions, the less active you need to be in the market. This is where selecting monthly positions may be more appropriate to play conservatively to generate a steady cash flow monthly.
Personally, use the 2% to start and look for strikes that offer you the 2% based on the week or the month DTE. See which strike you prefer based on resistance. Once you have that in mind, you may find that you can select a DTE that offers a higher than 2% return based on resistance.
If you gave me the options of selecting 5 contracts to play weeklies that could potentially generate $2,000/month or 20 contracts that will get me $2,000/month I would more than likely take the 20 contracts as it would give me a farther strike and less likelihood of it being executed or needing to be rolled.
40 Delta
27 DTE, we select 32 delta since the next delta is 46
Strike Price is 170, 2.60 premium
30 Delta
27 DTE, we select could select the 32 delta or 19 delta
Strike Price is 170 (32 delta), 2.60 premium
Strike Price is 175 (19 delta), 1.21 premium
15 Delta
27 DTE, we select 19 delta or the 10 delta
175 Strike Price (19 delta), 1.21 premium
180 Strike Price (10 delta), 0.52 premium
40 Delta
76 DTE, we select 33 delta since the next delta is 42
175 Strike Price (33 delta), 4.70 premium
30 Delta
76 DTE, we select could select the 33 delta or 26 delta
175 Strike Price (33 delta), 4.70 premium
180 Strike Price (26 delta), 3.20 premium
15 Delta
76 DTE, we select 19 delta or the 14 delta
185 Strike Price (19 delta), 2.13 premium
190 Strike Price (14 delta), 1.39 premium
Should allow you call to expire
When to close
When to roll
Good Reads
Good Reads
How to Pick a Good Covered Call (One of my favorite reads that helped me to get started)
Poor Man's Covered Call (This offers a cheaper alternative to owning shares)
Think About It:
Think About It:
S&P 500
Find three stocks on the S&P 500 that offer dividends and are optionable.
Find three different stocks from the ones above, that have shown a strong split history
What is the average annual return on each stock (use splithistory.com)
Of the 6 different stocks, can you achieve a 2% return on premiums from a 40 delta, 30 delta, and 15 delta?
This should have three response for each stock
What is the typical volume and open interest for each stock? Approximates.
Which offers more weekly options?
Which stock do you prefer for CC's and to hold stock?
Nasdaq
Find three stocks on the Nasdaq that offer dividends and are optionable.
Find three different stocks from the ones above, that have shown a strong split history
What is the average annual return on each stock (use splithistory.com)
Of the 6 different stocks, can you achieve a 2% return on premiums from a 40 delta, 30 delta, and 15 delta?
This should have three response for each stock
What is the typical volume and open interest for each stock? Approximates.
Which offers more weekly options?
Which stock do you prefer for CC's and to hold stock?
Calculations 1
You own 100 shares of AAPL, your average cost is $125, total cost is $12,500
What is the Weekly premium expiring within 10 days at the 40, 30, and 15 delta
What is the Monthly premium expiring within 30 days at the 40, 30, and 15 delta
Would you rather use Weekly or Monthly CC's? Why?
Calculate the 2% Rule (show your work).
Which options (pun intended) offers you the ability to get 2%/month or greater?
Which options are the riskiest? Why?
Calculations 2
You own 100 shares of MSFT, your average cost is $250, total cost is $25,000
What is the Weekly premium expiring within 10 days at the 40, 30, and 15 delta
What is the Monthly premium expiring within 30 days at the 40, 30, and 15 delta
Would you rather use Weekly or Monthly CC's? Why?
Calculate the 2% Rule (show your work).
Which options (pun intended) offers you the ability to get 2%/month or greater?
Which options are the riskiest?
Calculations 3
You own 100 shares of AMZN, your average cost is $124, total cost is $12,400
What is the Weekly premium expiring within 10 days at the 40, 30, and 15 delta
What is the Monthly premium expiring within 30 days at the 40, 30, and 15 delta
Would you rather use Weekly or Monthly CC's? Why?
Calculate the 2% Rule (show your work).
Which options (pun intended) offers you the ability to get 2%/month or greater?
Which options are the riskiest?
Analysis
Would you rather sell CC's for AAPL, MSFT, or AMZN? Why?
Provide an ACER response with actual facts and calculations for your decision.
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