Tackle 25 List: The Best Stocks for Covered Calls (2016 Edition)
February 2, 2016
Last update: August 2021
The latest edition of the Tackle 25 for 2016 is up and better than ever. While the Tackle 25 is not a long-term fundamental or technical list, we certainly took those forms of analysis in mind when selecting the 25 stocks placed on Tackle Trading’s list of best covered call stocks. The Coaches at Tackle Trading believe in monthly cash flow as wealth creation is a byproduct of the compounding of the gains on monthly cash flow. We are not necessarily concerned with profit or loss as the writing of the call will offset any downward pressure in price over time.
The covered call is the financial market’s version of the real estate rental agreement. Whereas in a rental agreement the investor will find a property to invest in and create monthly cash flow through renting out the property. The covered call is similar in that an investor will find a different asset class called a stock and create monthly cash flow through selling calls options against the stock that is owned.
In creating the list Tackle Trading took into account the following: PE ratios, PEG, Earnings Growth, Earnings Projections, ROE, Profit Margins, Market Cap, Volume in both the stock and options, technical trends and many other factors. However, the list is primarily a covered call list with one of the most important criteria being that of Cash Flow Expectation (CFE) which is the combination of the 12-month average dividend and the cash flow received from the selling of the call options. One last criteria is that of ROID. This is an indicator that I created for credit-based trades to compare two different credits. It takes into account both the ROI on the credit in comparison to the delta which determines probability. ROID has been expanded to also include naked puts, covered calls, short strangles, and all credit spreads.
Covered Calls For Income: The basics of the Covered Call Strategy (Webinar)
Covered Calls is a great way to increase your monthly income derived from your investment portfolio. In this webinar, Coach Matt will go through the basics of this powerful options strategy explaining the advantages of the Covered Call over the Real Estate rental agreement, and also talk about the Tackle 25 List.
Covered Calls Rules
Philosophy of the Covered Call
The Covered Call is a cash flow strategy that includes buying an equity in increments of 100 shares and selling call options against the underlying equity position for 1 contract for every 100 shares owned. Liquidity is an important factor, the options should carry enough liquidity for the trader to be able to buy back calls sold, sell new calls when needed, and get in and out of the position as needed. Covered calls can be used in trading accounts, investing accounts, and any account that is looking for cash flow as a core component of its performance.
Construction of a Covered Call Position
Building a Covered Call requires 2 actions, 1st buying a stock and 2nd selling a call. The stock should be bullish or neutral, and generally fit the traders overall investment objectives. Stability, consistency and credit are important factors to consider. Many traders prefer stocks that pay dividends, but it is not a mandatory component. To build the covered call you need to buy the stock in increments of 100 shares. This can be done individually or it can be done simultaneously with the sell of the call option.
Technical Analysis
We typically look to enter into a long-term position in neutral to bullish trends. This includes reversal patterns such as the inverted head & shoulders as well as the winner formations. However, if the trend moves bearish through the breaking of support on the weekly charts we will make a determination to add insurance through by put options. See trade management below.
Expiration Date
This rule is based on theta which is the time decay of the option. On Tackle 25 we have included stocks with monthly and most with weekly options. Having the ability to trade weekly options allow traders to manage the trade as well as be more efficient with the 30 day CFE. We have based the Tackle 25 on the 30 day CFE. However, in cases where the trader cannot get close to 30 days out it is perfectly acceptable to sell more time. Traders want to sell between 30-45 days of time to maximize theta. This is the most efficient use of time.
Ideal Strike Price for Covered Calls
The strike price the trader is looking to sell is the delta closest to .40. Delta determines a couple of things and ranges from 0-1. The first is the option value given a $1 movement in the stock with the second being probability of that strike price finishing in the money (ITM) or out of the money (OTM). If the strike price finishes OTM the value of the strike sold will have zero value.
Position Size
One of the mistakes new traders make is that put all their eggs in one basket or they place too much of their portfolio in one stock in comparison to other positions in the portfolio. Tackle Trading believes in equality of position size with max rules. As an active trader, I like less position size per trade and more trades. However, there are many ways to build amazing portfolios. Typically a position size less than 20% is preferable. For example, if the individual has $100,000 in their portfolio and for a covered call has a max position size rule of 10% the individual can place up to $10,000 in the trade. Take FSLR for example which is currently trading at $65.99. To determine how many shares to purchases the individual would take 10,000 / 35.99 = 277 shares. The individual would then purchase 200 shares in a retirement-based account or 400 shares in a margin account. The reason is very simple, the covered call is based on every 100 shares owned the individual would write one call option. If the individual purchased 300 shares in a retirement account or 600 in a margin account that would break a rule. We do not break rules at Tackle Trading.
Trade Management
There are many ways to successfully manage a covered call. Which management technique the individual uses is typically based on whether the individual wants to get exercised or not which means they would sell the stock. In discussing trade management the traders always looks at what can happen to the trade if the stock goes up past the strike sold, stays neutral, or moves lower in price.
Scenario #1: Stock moves up past strike sold
The call option will increase in value and eventually need to be bought back (potentially for more $ than the original credit) and rolled to a new call. If the value of your call ever loses its extrinsic value to where that extrinsic value represents less than 1% of the underlying price, then roll the option.
Scenario #2: Stock stays neutral
The call options value will decrease over time. Once the value of the extrinsic value of the call is less than 1% of the stocks price, roll the call option to a new strike and expiration.
Scenario #3: Stock moves down in price
If the stock moves down, the value of the call option will drop, and once its value is less than 1% of the price of the stock, roll the option to a new strike and expiration.
Scenario #4: Stocks breaks weekly support
Consider either selling the stock and taking your loss as an investor, or buying a put option in the same expiration as the call you’ve sold to protect the downside risk. Buy a put only as a protective measure during short-term drops in price and/or market or sector risk that is driving the stock lower. You can buy the put manually, or use a conditional trigger at a specific stock price that represents where you want to protect.
Get the Tackle 25 list (2016 Edition)
Download the 2016 edition of the Tackle 25 Covered Call list by clicking on the button below (PRO Members Only).
Journal your Trades
Now that you’ve downloaded the Tackle 25 list and started to cash flow, how about journaling your trades?
Good traders keep excellent records. Quality trading journals are essential to your progress and growth as a trader and keeping good records will help you learn more from both your income and expense trades. Disciplined use of quality trading journals will benefit you greatly by specifically tracking and measuring your overall performance with a constant eye on your success.
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Wow. This is great stuff!! Thanks, Matt
The value of being a Tackle Trading member is once again confirmed!
Thank you Coaches!!
Thanks Matt. This will be one of the pillars of my trading plan for 2016!
I’M GONNA POP SOME TAGS, GOT TRADING CAPITAL IN MY POCKET, TACKLE 25 COVERED CALL LIST, THIS IS FREAKING AWESOME!
These guys are beyond legit! Finally!!! People who really care about people.
Eagerly waiting for the video with better audio
Thanks Matt, for making this available. Great seeing you here in Dallas!
Thank you Team.
Team, great list, 1 question…
With GPRO having the highest ROID on this list, yet recently tanking yesterday down to $12.18… is this still a good buy if I’m not yet invested in GPRO or should I wait for it to consolidate before buying in?
I see a similar price drop happened on 10/18/15 and it still hasn’t recovered from that.
Why I ask: The cash flow from the covered call wouldn’t outweigh the stock price loss if the stock keeps going down.
Would it be better to buy now or wait for consolidation to buy?
I am holding it at 16.90 and then just bought more to lower my break even and sold calls against it.
Main concern for you is whats your outlook from here.
Its bearish now , but will it hold. Fundys are going to be adjusted soon from analyst so to early to say what happens there.
Technically bearish so bullish positions really should be added in bull trend or covered calls otm in neutral to bull stock.
therefore if I was getting in now, and didnt have a true bottom signal yet I would hedge my stock purchase with ATM or slightly ITM calls. Or wait for fundys to adjust and volume to subside before commiting.
Thank you Coaches!!!!
love the tackle 25 guys , Thanks coaches
Love the tackle 25!!!
Thanks for the new video Matt
Can someone expand how trade management #1 will work? The wording is throwing me off.
Trade Management #1: Stock moves up past strike sold: the call option will increase in value and eventually need to be bought back (potentially for more $ than the original credit) and rolled to a new call. If the value of your call ever loses its extrinsic value to where that extrinsic value represents less than 1% of the underlying price, then roll the option.
For example: I have a USO stock that I bought for $8.85. The MAR 16 Call I sold for was .35. If USO moves up in price, my call option will increase in value. I know how to roll, but I don’t how what Matt meant when he says, “If the value of your call ever loses its extrinsic value to where that extrinsic value represents less than 1% of the underlying price… then roll the option”
The extrinsic value of my Call option is currently is 0.36 cents. 1% of the stock price is 0.0885, but how will it get there if the stock is moving up?
If the stock moves up in price (say past $10), then the intrinsic value will be $1.15; the extrinsic value will only go down as time passes. Is that correct?
Once it extrinsic value hits 0.08 cents, then it’s time to roll out? Is that the trigger point? What do we roll to?
Thanks,
-Frank
Based on those numbers, when the extrinsic value drops below .08, then roll your option. In high volatility stocks (USO qualifies right now) you could also use the 2% mark as your rule which would mean to roll it when it drops below .16.
Extrinsic value drops from time passing, volatility dropping or the strike moving further In the money or Out of the money.
Roll to the location that you set your new covered calls to. 30 days and .40 delta would be a standard location.
Thanks Tim for the feedback and the further discussion on the 2/9/2016 Coaches Show on this topic.
can someone tell me what the dte stands for on the charts that you down load and fill out
i’m talking the chart above that you down load and input, like the short puts, bull put,bear call??? and so on
thanks i figured it out thanks .
Covered calls is the strategy I’d like to use as a beginner until I become more comfortable. Since I cannot trade using my 401k account, I am using a personal TDA account I am funding every month. Problem is, it is difficult to buy stocks that are more than $10-$15 currently while also allocating funds in multiple trades. Is it okay to just concentrate on stocks within this price range for now until I add more funds in the account? Will Tackle 25 include such lower priced stocks in the future?
Is it a typo? If FSLR costs 65.99, than you can buy 10,000/65.99, and not 10,000/35.99 (as above)?
Thanks so much! Great Report! I’m ready to jump into these trades.
I am still attending Master Trader live class but I can’t wait to get start with Tackle 25 Cash Flow. Thank you so much for sharing!
Awesome staff, thank you very much for the help.