Tales of a Technician: Your Covered Call Questions … Answered!
October 26, 2016
Last update: August 2021
Listen up you covered call lovers. Today I’m tackling some common questions on how to get the most out of your beloved buy-writes. And if you have any further queries get clickety-clacking in the comments section below, okay?
How do I manage covered calls during earnings season?
Ahhhh, earnings season. The quarterly ritual where the market gods shower good little boys and girls with profits untold while sending down death and destruction on the naughty ones (I’m looking at you Under Armour).
For starters, you can sidestep all the drama by simply using ETFs. If you’re playing USO, EEM, IWM, SLV, or any of the usual suspects then there is no earnings season. Just keep on keepin’ on. Every month looks the same for these guys.
For those of you that own stock for the purpose of selling monthly covered calls, I assume you’re comfortable with the long-term fundamentals of the company and thus confident that over time the gains from upside earnings surprises will outpace the losses from downside earnings disappointments (AMZN is a good example).
If you’re not comfortable with this then why, pray tell, are you holding into earnings, you gambler? Glutton for punishment? Think you’re some special snowflake lucky enough to guess the direction?
Nonsense, I say.
It’s tricky to conduct a consistent option selling campaign on individual stocks if you’re not willing to hold into earnings. I suppose you could collar the stock into every announcement (i.e. add a long put to your short call) if you wanted to strip out the earnings risk, but I personally would find that a quarterly annoyance.
The adjustment I would probably make with my covered calls into earnings is selling a lower strike call (maybe ATM or ITM) to capture more premium. That way you’re carrying more protection into the event.
Sure, you’re cutting off your upside more, but I bet you can still capture a 4% to 6% return which is mighty fine for one month’s work.
Bottom line: If you’re willing to hold into earnings but want to reduce risk, sell a lower strike call or, if you must, grab an OTM put.
When and why do I roll a covered call?
Don’t get caught up in the fancy-pants jargon. Rolling a covered call simply means you are exiting the existing short call and simultaneously selling a new one.
The simplest rule I can provide for timing the adjustment is: roll when there is little to no time value remaining in the position.
If your short call is OTM I would probably roll when it drops in value toward 5 or 10 cents. An exception to this would be if you want more protection in the position. Say you originally sold your call for $1.00 and it’s since dwindled in value to 30 cents. Plus, you’re kind of bearish on your stock and want more protection. Maybe you roll the call by buying to close it for 30 cents and selling another one at a lower strike or further month (or both) to capture more premium.
If your short call is ITM I would probably roll to avoid being assigned once the time value has dropped toward 5 or 10 cents.
There are a few reasons as to why you might roll. First, you might roll to avoid being assigned so that you can continue selling covered calls. No sense in allowing assignment and parting with your shares if you’re going to buy them right back the next day.
Second, you might roll to acquire more premium because the existing covered call has lost most (if not all) of its time value.
Good luck!
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Thanks Tyler.
Thanks Tyler ! Your writing make’s me LOL But it sinks in !
Thank ye Thomas!
Thanks Tyler – as usual witty and timely!
Thanks for taking the time to do this.