Selling Covered Calls is a conservative options trading can turbocharge your portfolio's returns.
Here's your ultimate guide so you can you can take advantage of selling Covered Calls 🧵
Here's your ultimate guide so you can you can take advantage of selling Covered Calls 🧵
1: Understand Covered Calls
A call option is a contract that gives the buyer the chance to buy 100 shares of a stock at an agreed-upon price.
To make it covered, you the seller must hold 100 shares of a stock and must sell the shares if the stock reaches the agreed-upon price.
A call option is a contract that gives the buyer the chance to buy 100 shares of a stock at an agreed-upon price.
To make it covered, you the seller must hold 100 shares of a stock and must sell the shares if the stock reaches the agreed-upon price.
As soon as you sell the contract, you collect what is known as a premium.
The people buying your covered call are likely short sellers at big investment firms that are trying to hedge their short positions with call options.
The people buying your covered call are likely short sellers at big investment firms that are trying to hedge their short positions with call options.
2: Learn The Greeks
The Greeks are the numbers that drive the behavior of an options contract.
Today we’ll focus on Delta and Theta
The Greeks are the numbers that drive the behavior of an options contract.
Today we’ll focus on Delta and Theta
Delta is the amount an option price is expected to move based on a $1 change in the underlying stock.
It’s used as the chance that a contract ends "in the money" (stock price meets or exceeds strike price).
It’s used as the chance that a contract ends "in the money" (stock price meets or exceeds strike price).
For example, if an option has a Delta of 0.19, that means there's a 19% chance the option will end in the money.
Theta is the measure of how much an option should decrease in value after the day ends.
Theta should increase the closer you move to the expiration date of the contract.
For example, if Theta is -0.05, the options contract should decrease in value by $0.05 by the end of day.
Theta should increase the closer you move to the expiration date of the contract.
For example, if Theta is -0.05, the options contract should decrease in value by $0.05 by the end of day.
3: Hold 100+ Shares Of A Stock
The difference between selling a call and a covered call is having 100 shares to cover the contract.
Options can be as risky as you want them to be, and selling calls that aren't covered is certainly a risky tactic.
The difference between selling a call and a covered call is having 100 shares to cover the contract.
Options can be as risky as you want them to be, and selling calls that aren't covered is certainly a risky tactic.
4: Sell A Covered Call At A Delta You're Ok With
Investors often chase higher options premiums but with higher premiums comes a higher chance that the stock ends in the money.
To combat this, pick a contract at a Delta you're comfortable with (for me it's between .15 - .25).
Investors often chase higher options premiums but with higher premiums comes a higher chance that the stock ends in the money.
To combat this, pick a contract at a Delta you're comfortable with (for me it's between .15 - .25).
Now let’s take a look at 4 possible scenarios for covered calls:
1. Stock ends in the money.
Let’s say you sell a covered call on Starbucks today for a $108 strike price.
If the stock closes at $108 or higher, you sell 100 shares at $108.
Make sure your average cost is under $108 so you can profit from this transaction!
Let’s say you sell a covered call on Starbucks today for a $108 strike price.
If the stock closes at $108 or higher, you sell 100 shares at $108.
Make sure your average cost is under $108 so you can profit from this transaction!
2. Stock goes on a run.
This one stings.
Let’s stick with our $108 Starbucks example, if Starbucks goes on a run and closes on Friday at $115, you still have to sell at $108 and you miss all that potential profit.
It’s part of the game but you can always buy back in.
This one stings.
Let’s stick with our $108 Starbucks example, if Starbucks goes on a run and closes on Friday at $115, you still have to sell at $108 and you miss all that potential profit.
It’s part of the game but you can always buy back in.
3. Stock does not end in the money.
This is an ideal outcome.
The stock doesn’t reach the $108 strike price, you keep your 100 shares & the premium.
You can also go right back to selling another covered call for the next week.
This is an ideal outcome.
The stock doesn’t reach the $108 strike price, you keep your 100 shares & the premium.
You can also go right back to selling another covered call for the next week.
4. Stock’s price crashes.
Covered calls do not offer any downside protection.
If the stock’s price were to tank, you have the option of waiting it out or adding to your position at this lower price to bring down your average cost.
Covered calls do not offer any downside protection.
If the stock’s price were to tank, you have the option of waiting it out or adding to your position at this lower price to bring down your average cost.
Some Tips I Use:
• ALWAYS sell above your cost basis
• Pick a Delta between .15 - .25
• Look for a 2-4% monthly return from premiums on the cost of your 100 shares
(example: if you have $100 of shares in XYZ company, aim to make about $2-$4 per month from covered calls)
• ALWAYS sell above your cost basis
• Pick a Delta between .15 - .25
• Look for a 2-4% monthly return from premiums on the cost of your 100 shares
(example: if you have $100 of shares in XYZ company, aim to make about $2-$4 per month from covered calls)
Some Tips I Use:
• Sell on Fridays if you can to maximize Theta decay
• Sell on green days because contracts become worth more
• Hold an extra 10 shares so if the stock goes on a run, you can sell your extra shares for some extra profit
• Sell on Fridays if you can to maximize Theta decay
• Sell on green days because contracts become worth more
• Hold an extra 10 shares so if the stock goes on a run, you can sell your extra shares for some extra profit
TL;DR:
• Covered calls are a conservative options trading strategy that can provide income from the stocks you already own
• There are five "Greeks" that drive the behavior of an options contract
• There are four possible outcomes when selling covered calls
• Covered calls are a conservative options trading strategy that can provide income from the stocks you already own
• There are five "Greeks" that drive the behavior of an options contract
• There are four possible outcomes when selling covered calls
Thanks for reading!
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If you got value from this thread:
1. RT the top tweet
2. Follow me @DrDividend47
3. Join 925+ others who read The Dividend Growth Newsletter.
New issue every Monday!
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