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.
Video Tutorial
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]
Learn How to Repair a Covered Call Gone Bad!
Join Coach D for an in depth look at a dynamic Covered Call repair strategy on $GMCR.
Options 101: How to set Basic Stops on Naked Puts and Covered Calls
In this video tutorial, Coach T walks the team through how to set a basic stop on a covered call or naked put position.
Options 101: How to find the perfect Covered Call Candidate
In this video tutorial, Coach T from Tackle Trading walks through a research session for covered calls.
How to use the Theta Research Tool to find the best stocks for Cash Flow
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.
Options 101: How to Add a Protective Put to A Covered Call
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.
Tales of a Technician: The USO Covered Call Nerve Strike
I seem to have struck a nerve with my call for a reverse split in USO. And that’s a good thing.
Video Tutorial: How to Repair a Covered Call to Reduce Risk
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.
Tales of a Technician: Theta and Covered Call Management
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.
Tales of a Technician: Covered Calls: Weekly vs. Monthly
With the advent of weeklys options the choices facing option traders has multiplied ten-fold. But it shouldn’t be overwhelming.
How to Pick a Good Covered Call
In this article we will breakdown the philosophy, construction, and management of the Covered Call cash flow strategy.
Tales of a Technician: Your Covered Call Questions … Answered!
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.
Trade Journal Series: How to use the Theta Research to find Covered Call candidates
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.
Tales of a Technician: Covered Call Alternatives for IRAs
How to leverage an IRA account by selling covered calls on long-term call options (aka LEAPS) instead of stock? Read on.
Options Theory: Collaring Earnings
Earnings season is upon us. Whether it’s a straight stock position, you’re holding for the long run, or one that you’re selling covered calls on there is a straightforward way to limit your risk.It’s called a collar.
Options Theory: What a Covered Call Trader REALLY Wants
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.
Options Theory: Picking the Right Stock for Covered Calls
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.
Options Theory: Combating Volatility with Covered Calls
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.
Tackle Today: Do you trade Covered Calls?
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
Tales of a Technician: When Covered Calls Move In-The-Money
Traders have all sorts of rules and guidelines for managing covered calls that move in-the-money.
Tackle Today: Meet the Covered Call
The Covered Call strategy is an old friend of Tackle Trading. This strategy is so cool that we can talk about it every single day and still come up with new ideas.
Tackle Today: Covered Calls for Cash Flow
One of the most popular techniques in the equity and options market is the Covered Call. A Covered Call involves the purchase of at least 100 shares of stock and then the sale of 1 call option against that stock.
Options Theory: Tips for Buying Puts with Covered Calls
Let’s talk about proper strike price selection for covered calls and protective puts.
Portfolio Protection For Beginners [Free Articles]
Long Put: IWM or RUT
In this video tutorial, Coach Matt walks thru how he has been handling the additional macro risk in the market by trading Long Put options on the IWM.
How to add Insurance to your Portfolio
In this video tutorial, Coach Matt takes a look at different ways to protect your portfolio accounts when the market goes south.
Protecting Your Money: Create your own Personal Gold Standard
Everyone invests. Everyone has money. Currency is a form of investment since the gold standard was removed from the currency system.
How to Protect Your Retirement
Coach Matt from Tackle Trading looks at how passive and active investors can insure their retirements against another potential market crash like in the sub-prime crisis of 2008-09.
Tales of a Technician: Tagging the Golden Goose: A Lesson in Portfolio Protection
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.
Tales of a Technician: A Trick for Financing Portfolio Protection
Come lear a Trick for Financing Portfolio Protection.
I Bought Portfolio Protection…Now What?
Today is the day we layout a game plan for exactly how to manage portfolio protection.
Options Theory: Hedging Basic Series Part 1 – What is Hedging?
What is hedging? Come learn the basics in this 3-part series.
Options Theory: Hedging Basic Series Part 2 – Why do Traders Hedge?
In part one of our new series on hedging, we defined precisely what the concept means. Today we’re turning to the why.
Options Theory: Hedging Basic Series Part 3 – When to Place Your Hedge
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?
Options Theory: Hedging Basic Series Part 4 – How to Hedge a Naked Put
The way that you go about hedging varies depending on what your strategy is. Come learn how to hedge a naughty naked put.
Options Theory: The Protective Put
The options realm is an insurance marketplace where stock owners can acquire protection against loss in their beloved equities.
Options Theory: VIX Spikes and Portfolio Protection
Today I want to talk a bit about the impact VIX spikes have on the cost of portfolio protection.
Tales of a Technician: Managing Protective Puts in a Crash
It’s nailing the management of Protective Puts that separates the men from the boys. Allow me to offer up a few ideas.
Tales of a Technician: How to Trade in a Bear Market
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.
Options Theory: This is What Capitulation Looks Like
Contrarians in a bear market seek signs of capitulation. Specifically, evidence that bulls are throwing in the towel and abandoning their once beloved positions.
Tales of a Technician: Of Legacies and Long-term Investing
Herein we explore the perks of lengthening your time horizon and embracing Long-term Investing.
Options Theory: Protective Put Management
You have questions on how to protect a portfolio. I have some answers. You’ll find them here.
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.
Legal Disclaimer
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.
One Reply to “How to Pick a Good Covered Call”
Great tutorial..thanks Tim.
Comments are closed.