If you haven’t come up with a detailed covered call strategy, it is time to do so. Trading without a strategy or trading plan is a recipe for disaster. The old trader saying of “trade the plan” is as valid today as when someone first said. Where to start?

Asses Your Risk Tolerance

As you a risk average person or do you swing for the back fence in everything you do? Are you somewhere in between? Understanding who you are is critical for sleeping soundly all night. Do you have the time to monitor positions during the day or will you have a few minutes in the evening or the morning? Is your worst nightmare losing money on a trade or missing a big swing up? Nothing is right or wrong, it’s just who you are.

Risk Averse
If you want to mitigate your risk on a stock you own and plan on keeping, than a good covered call strategy is to buy a long-put along with the call. For example, if Broadcom is trading at $44.29, you could buy the $43 put expiring in 5 months for about $3.60. At the same time, you sell the $45 call the next month for about $1.50 or better. You could basically pay for the “insurance” in two months and have three months of almost risk free call writing. Then rinse and repeat. This is called a collar strategy and sometimes called a married put. Technically, the collar definition seems to say that the purchased put is further out of the money and the married put is closer to the strike price. They seem to be used interchangeably these days.

Sort of Risk Averse

Sounds like an odd category; many people fall into this it seems. If you want downside protection and do not want to buy a put, then another way to purchase the insurance is to sell a deeper in the money call. Using the example above with Broadcom trading at $44.29, you sell the front month $44 call for $2.00. This makes your basis now $42.29. The stock can drop 4.5% and you would break even. If the stock finishes at or above $44, then you surrender the stock and pocket $1.71 ($2.00 option minus the amount in-the-money, $.29). While you gave up some gain, you also had insurance.

Swing for the Back Fence

Many traders bank premium by selling calls and puts on a stock in a strong uptrend. They pick a strike price far enough out of the money to let the stock run, and still has decent premium, then sell a put one or two strikes under the current stock price, below a strong support point. They now collect premium both ways. When you sell a put, you do not need to own the underlying stock, so you can sell more contracts. For example if you own 500 shares of Broadcom, you sell 5 calls because the stock needs to “cover” the call, then maybe sell 10 puts underneath. The puts can be turned into spreads for safety; in other words you sell the $42 put for $.95 and buy the $37 put for $.20, netting a credit of $.75.

Rules of the Game

At all times as a covered call writer, you need to understand your personality, the personality of your stock, what news events may be likely to affect it (and you). At the same time, you need to know how the sector is performing and how your stock is performing in that sector. On top of that, know what the broad market is doing.

When you line up these three variables, you will be able to judge what call strategies will work the best for the next week or month.

Author Bio: Tim Leary is a full time trader and writes (sells) covered calls, earning 3% to 5% monthly in bull and bear markets, with limited risk. To get a 50-page covered call writing report, click here. To learn more call strategies,click here

Category: Finances
Keywords: call strategies, covered call writing, covered calls