Selling CALLS

• 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

Selecting an Expiration Date

• 30-45 days

  • • Weekly can be very profitable, but requires the most management, watching current price versus strike, and limits upside potential

    • 30 days for more management; typically closing in 7-14 days, offers greater profit on covered calls being called away

    • 45 days for less management; typically closes every 14-21 days, offers more theta for premium and higher strikes, but less profit off premiums per year

    • For a trader looking for less management, 45 days is better

    • For cash flow, 28-30 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 45. Choose the closest based on your preference.

• Be sure to make your strike selections based on your DTE time frame 

  • • 30-45 days, select daily and weekly charts to make your decision or simply select 5-10% OTM

    • Weekly, select hourly and daily to make your decision

The farther DTE is from expiration, allows you to select a higher strike price for a higher premium. See Below.

• • Stock: SOFI, Current Price $18.25/share, 100 shares = $1,825

  • The left picture is 5 DTE

    • • Selecting a 3-4% OTM we would select a strike price of 19

      • Delta of 0.33 (moves $33 for every $1 movement in the share price). 

      • You would receive a premium of 0.30 or $30 (0.30 x 100 shares) for selling the contract and promising to sell your shares if it is above $19

      • $30 represents a 1.6% ROI (Goal was 2% a month)

      • If your contract expires ITM(in the money - above your strike) you would also gain $19.00 - 18.25 = 0.75 x 100 shares = $75 more or 4.1% ROI

      • That would make your total $105 ($30 + $75) or a 5.7% ROI 

  • The right picture is 26 DTE

    • • Selecting a 5-10% OTM we would select either a strike price of 19.5 or 20

      • Delta of 0.37 for a 19.5 strike price or 0.32 for a 20 strike price 

      • 19.5 premium would be 0.68 or $68 (3.7% ROI); if your contract expires ITM that would return a total of $193 (19.50 - 18.25 = 1.25 + 0.68 = 1.93) or 10.5%

      • 20 strike price premium would be 0.54 or $54 (2.9% ROI); if your contract expire ITM that would return $229 (20.00 - 18.25 = 1.75 + 0.54 = 2.29) or 12.5%

  • Both the weekly and 30 DTE offer great opportunities for ROI, but it comes down to how often you want to manage your positions. The time and effort can be worthwhile to grind out weekly and have more control over the movements, but monthly can be just as impactful with lower costs and less attention.

30 Delta

• Some people select the closet to 30 delta rather than selecting 5-10% OTM

• 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. 

40 Delta

• • Can be a way to generate quick premiums, but may often see your position be called away if not rolled

  • This can also cap the upside of large swings and profits

• 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 30 DTE positions may be more appropriate to play conservatively to generate a steady cash flow monthly.

• Personally, I started by looking for strikes that offered 2% based on the week or the 30 DTE. 

  • • Look for areas of resistance or where the stock could move within the next week or 30 days

    • Determine if you do not mind losing the shares or if you want to keep the shares long term

    • Select a DTE that offers at least a 2% return based on resistance or whether you care about keeping your shares

    • Sometimes, I will take a larger premium than 2% in hopes that resistance will keep the stock from being called away 

• If you gave me the options of selecting 

  • • 5 contracts to play weeklies that could potentially generate $500/week (4 x $500 = $2,000) 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, less likelihood of it being executed or needing to be rolled, less management

• 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)

• When to roll covered calls

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.