Introduction to Covered Call Trading

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As cash flow is generated you can continually re-cycle the money from positions that are called away. It's like hitting a lot of "singles" instead of hitting a "home run" or what nobody ever wants to talk about "striking out".


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There are two parts to finding a good covered write position, the best stock and selling the right call. Many tend to automatically focus on the maximum return or the greatest percentage from the call. In my view, that is a mistake. A larger call premium reflects extreme stock volatility, in my view, a synonym for risk.

Covered Call

Some will disagree with me on that point, but I prefer starting these positions by finding a stock with good fundamentals. Purchasing the stocks of strong companies, some with reasonable dividends, but not necessary for success and enhancing your yield by selling near-term calls. I maintain a list of about candidates to draw from, updated for changing prices and market conditions, as I put the trades on from month to month.

Staying on the "right stock" issue, this is not a primer for stock picking, but you will find with practice and experience some stocks are particularly suitable for writing calls.


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  • However, one point I continue to stress, select a stock that you would not mind owning in your portfolio in the event the shares are not called away in a market decline. It always helps to have a viewpoint of the overall direction of the market, but by selling calls against your position there is some flexibility.

    The biggest risk to a covered write position is that the stock declines. Of course, this is the same risk that you have with stock ownership, but with this strategy you do get some protection from the sale of the call option. Thus the single most important rule comes back into play - select a stock that you do not mind owning in your portfolio. I have seen many choose volatile stocks just to get the enhanced call premium, only to be left with a portfolio of stocks after a market decline that they wouldn't own otherwise, it's a sure recipe for disaster.

    Many can't grasp this concept, buying a stock that I wouldn't mind owning, but hoping it gets called away!

    The Basics of Covered Calls

    Yes, that sums it up, many do grasp the concept rather quickly after they see the income roll in. I often refer to this part of my holdings as the "rent a stock' portfolio. This "Call Writing for Income" portfolio was started in my SA Instablog , where all trades were posted and documented. The following table represents the 'actual" portfolio positions with the results attained so far during As one can see the perceived "small" premiums do add up quickly.

    The latest trade is posted here.

    Covered Call Writing Strategy For Income- An Introduction - Fear & Greed Trader | Seeking Alpha

    As stated, I use this strategy on a 'portion" of my holdings to increase income and view it as another weapon in an investors arsenal in the search for portfolio yield. It is not being portrayed or intended to replace sound investment principles such as a solid dividend growth portfolio or other income strategies.

    Past performance is no guarantee of future results , however, it is my intention to continue to provide information with a series of future blog posts to document both the trades and results of this strategy. I invite ideas, suggestions as the trades are executed to follow along and check the results. The author wrote this article themselves, and it expresses their own opinions.

    The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

    But notice how, in Figure 2. Understanding the moneyness of the call option is important, because then you only need remember that the moneyness of the put is the opposite, ITM and OTM. Introduction to Options Before getting into covered calls, I have to cover some option basics. What is an Option? Stock options thus have two main characteristics: Calls the right, but not the obligation, to buy the underlying stock Puts the right, but not the obligation, to sell the underlying stock Figure 2.

    Key Features of Options Option Contract — Each exchange-listed listed call or put contract normally covers shares. Open Interest — The number of contracts of an option series outstanding.

    What is a Covered Call?

    Call option Underlying stock: December If we change any of these elements, we get a different option series. The Options Clearing Corporation and Option Settlement There is no risk that, upon exercise of an option, the other side will fail to perform. Similarities and Differences Similarities Options and stock both are securities.

    Stocks are traded on exchanges and also over-the-counter e. Stock options trade only on exchanges regulated by the SEC Market makers buy and sell stock options, as they do stocks. Differences Stock represents an equity ownership interest in a company. An option is a contract. Options expire on their respective expiration dates. An option not exercised by its expiration date expires worthless.

    At any one time, there is a fixed number of shares of stock outstanding. Please enter a user name. I understand I can withdraw my consent at any time. I am an advisor. An Introduction to Covered Calls. Covered Call ETFs Covered call writing is an options strategy used to generate call premium from equity holdings, which can, in turn, result in additional income within an investment portfolio.

    U 1 Horizons Enhanced Income U. A Unique Approach to Covered Call Writing While all of Horizons covered call ETFs are actively managed, they do follow some important investment rules which we believe optimize the performance of the strategy. How a Buy-Write Strategy Can Typically be Expected to Perform in the Following Markets During bear markets, range-bound markets and modest bull markets, a covered call strategy generally tends to outperform its underlying securities.

    For illustrative purposes only. Back to Learning Library. Privacy Trademarks Accessibility Terms of Use. Click here to read more Horizons ETFs is committed to providing a respectful, welcoming and accessible environment for all persons with disabilities; treating all individuals in a way that allows them to maintain their dignity and independence. Get in Touch Subscribe.

    Profiting from Covered Calls

    Please enter a user name Password: Exposure to the performance of large capitalization Canadian companies as well as distributions which generally reflect the dividend and option income for the period. Horizons Enhanced Income U. Exposure to the performance of large U. Exposure to the performance of large capitalization international, non-North American companies and monthly distributions which generally reflect the dividend and option income for the period.

    Exposure to the performance of Canadian companies involved in the crude oil and natural gas industry and monthly distributions which generally reflect the dividend and option income for the period. Exposure to the performance of Canadian banking, finance and financial services companies and monthly distributions which generally reflect the dividend and option income for the period.

    Exposure to the performance of North American based gold mining and exploration companies and monthly distributions which generally reflect the dividend and option income for the period.