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Tackle Today: How to Reduce Volatility with Covered Calls

December 1, 2021

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Tackle Today: How to Reduce Volatility with Covered Calls

≈  Covered Call Perk #2 ≈


Did you know covered calls can dramatically cut your portfolio volatility? The short-call component of the trade acts as a natural hedge against your stock position. Remember, the covered call consists of two parts. First, you buy 100 shares of stock. Then, you sell 1 call option. 

When you add the short call, you’re lowering the initial risk of the position by the amount of the call’s delta. Here’s a simple way to think about it. 

  • If you sell a 30 delta call, then you’re reducing your exposure for the next $1 move in the stock by 30%. 
  • If you sell a 20 delta call, then you’re reducing your exposure for the next $1 move by 20%. 
  • If you sell a 40 delta call, then you’re reducing your exposure for the next $1 move by 40%. 

So on and so forth. 

As the call value (and delta) dwindles, so too does its volatility reduction capabilities. That’s why active traders are always selling new, more valuable calls against their stock positions. When you analyze the performance of a long stock versus a covered call, the latter always has a smoother flight path. In other words, the peaks and valleys in its equity curve aren’t so extreme.

And that’s a big reason why more conservative traders embrace them. They make the volatile game of stock investing less so.

🛑 Upcoming Webinar: Covered Call for Beginners › What is a Covered Call and how to trade it? ›› December 6th 2021, 8:30 PM EST

Join Tackle Trading in this upcoming Trading For Beginners webinar on the basics of this powerful options strategy: the Covered Call. Covered Calls is a great way to increase your monthly income derived from your Investment Portfolio. In this webinar, Coach Matt will go through what the Covered Call is and how to trade it.

Click on the button below to go to YouTube and set a reminder so you won’t miss it when Coach Matt goes LIVE.

Chart of the Day: CBOE S&P500 Buy-Write Index

Consider the volatility characteristics of buying and holding the S&P 500 (black) to selling covered calls on the S&P 500 (green). Notice how the green line exhibits much less fluctuation? Chalk that up to the short calls.

Video of the day: Queen’s Court – Three potential candidates for Covered Calls

Coaches Matt & Emily talk about three potential candidates for Covered Calls in today’s Queen’s Court: $AMAT, $AAPL, and $KR.

Today’s line up

Traders Lounge 11 PM EST

Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.

The Coaches Show Replay

If you missed last night’s episode where Coaches Gino Poore and Mark Justice talked about Protective Techniques or would like to watch it again, check it out here.

Halftime Report 12:30 PM EST

The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day, and fun in a way that only Matt and Tim can deliver.

Trade Masters 7:00 PM EST

Every Wednesday at 7 PM EST join us on the Trade Masters where two Coaches go head-to-head to see who can find the best trading setup.

Trading Justice Podcast

Trading Justice 453: The Covered Call Strategy

In this episode, Matt and Tim discuss the mindset and mechanics regarding the Covered Call equity and options strategy. Covered Calls are a great strategy to use in trading and investing account for capital appreciation and cash flow. Listen in to learn more about Covered Calls and how they can reduce volatility, give you a natural hedge, and more control in your returns.

Listen to the episode in the player below:

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