Last update: August 2021
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.
Position Size Rule: Covered Calls can be as small as a trader can trade and up to 10% of your portfolio. The larger the portfolio, the smaller the per position size is recommended. The smaller the portfolio, the Covered Call may need to increase in size but should not exceed 10%
Construction of the Covered Call
Building a Covered Call requires 2 actions:
- Buying a stock
- 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 selling of the call option.
Selling the call requires the trader to select the expiration and strike price of the option. For consistency, use the following guidelines:
Theta Rule (Days Till Expiration – DTE)
28-60 days. For cash flow, 28 days is better; for a trader looking for less management, 60 days is better.
Delta Rule (Strike Price)
Use the call closest to 40 delta. For example, if you have a strike with a delta of .38 and .46 you would use the .38. Traders who are trying to maximize cash flow would use a delta rule with the highest extrinsic value.
Management of the Covered Call
If the stock moves up
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.
If the stock moves sideways
the call options value will decrease over time. Once the value of the extrinsic value of the call is less than 1% of the stock’s price, roll the call option to a new strike and expiration.
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.
If the stock becomes bearish
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.
If the stock has earnings or a corporate event that has risk
Buy a protective put in the same expiration with the same delta as the call you’ve sold. Use a risk graph to analyze your potential gain or loss from the earnings gap.
In this video, you are going to learn how to pick good Covered Calls to generate passive income.
Tackle Trading Resources on Covered Calls
Continue learning about this powerful options trading strategy: the Covered Call. Tackle Trading has all the resources you need to MASTER this strategy like a PRO.
Covered Call For Beginners [Free Articles]
In this video tutorial, Coach T walks the team through how to set a basic stop on a covered call or naked put position.
In this video tutorial, Coach T from Tackle Trading walks through a research session for covered calls.
In this video tutorial, Coach Matt goes through the latest edition of the Options Research Spreadsheet explaining how to use it to find the best stocks to cash flow.
In this video, Tackle Trading’s Coach Tim explains when, how, and why a trader would buy a put option on a covered call position.
The Tackle 25 2016 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
I seem to have struck a nerve with my call for a reverse split in USO. And that’s a good thing.
Watch and learn as Coach D demonstrates how to roll a covered call down and out to offset risk and bring in more premium as he repairs a protective call write that has traded below the strike price and break-even price point.
Just when I think I’ve exhausted my inventory of covered call insights I stumble upon yet another blog worthy concept. Today I’ll shine a light on how to identify the remaining profit in your trade, an essential skill for covered call management.
With the advent of weeklys options the choices facing option traders has multiplied ten-fold. But it shouldn’t be overwhelming.
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.
In this video tutorial, Coach Tim Justice teaches how to find the best candidates to trade the Covered Call options strategy using the Theta Research tool.
How to leverage an IRA account by selling covered calls on long-term call options (aka LEAPS) instead of stock? Read on.
The Tackle 25 2017 Edition is up and better than ever. This list contains the best stocks to cash flow and compound your gains.
I think I could write about covered calls and naked puts every single week and still have plenty to say at the end of the year.
I received an email the other day from a trader that bought a few stocks and has been selling covered calls against them. He had questions. I have answers. Here we go.
Nothing like a monster “V” shaped reversal to get the juices flowing, am I right? Count me among those suffering whiplash over the market’s death-defying whoops and whirls of late. Yesterday was particularly annoying for those short delta toting traders like me.
Last update: August 2021 ≈ Cash Flow and Growth ≈ I put a poll question in the clubhouse recently asking the Tackle Trading community a simple question: Do you trade Covered Calls? If you haven’t answered the question yet, you still can HERE. Of the 5 potential answers, the breakdown was interesting. 38% said YES
Traders have all sorts of rules and guidelines for managing covered calls that move in-the-money.
Let’s talk about proper strike price selection for covered calls and protective puts.
Portfolio Protection For Beginners [Free Articles]
Everyone invests. Everyone has money. Currency is a form of investment since the gold standard was removed from the currency system.
You’re a goose chaser. Admit it. It’s the gold you seek. And that’s okay. You’re in good company. Most of us round these parts have been searching for the big bird for ages. Some have even tagged one.
Come lear a Trick for Financing Portfolio Protection.
What is hedging? Come learn the basics in this 3-part series.
In part one of our new series on hedging, we defined precisely what the concept means. Today we’re turning to the why.
With a sound foundation on the what and why of hedging, we’re now ready to dissect the devil. Namely, when do I place my hedge?
The way that you go about hedging varies depending on what your strategy is. Come learn how to hedge a naughty naked put.
Today I want to talk a bit about the impact VIX spikes have on the cost of portfolio protection.
It’s nailing the management of Protective Puts that separates the men from the boys. Allow me to offer up a few ideas.
The bears are roaming. And while their sudden emergence likely spelled losses for traders far and wide, the pain doesn’t have to persist. I look at this as a “fool me once, shame on you; fool me twice, shame on me” situation.
Contrarians in a bear market seek signs of capitulation. Specifically, evidence that bulls are throwing in the towel and abandoning their once beloved positions.
Herein we explore the perks of lengthening your time horizon and embracing Long-term Investing.
Tackle 25 Covered Call Premium System
Covered calls are ideal for your IRA and can help you compound those gains and generate cashflow.
So, what makes the Tackle 25 so popular? Simple: it’s the power of selling options on these carefully selected stocks for cash flow and growth. Bullish, bearish, or neutral, this system works through the power of compounding premiums consistently over time.
Reports [Premium Content]
The Weekly Premium Reports are a part of the PRO subscription.
Tackle Trading Playbook [FREE for PRO Members]
PRO Members now have unfettered access to the Tackle Coaches’ personal playbook containing thirty-one powerful trading strategies categorized according to the Options Greeks. Bullish, bearish, or neutral market conditions, this Playbook will help you dial up the right call more often and with greater confidence.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.