13 Minute Read

Tales of a Technician: The Case for Covered Calls NOW!

January 18, 2016

By | 6 Comments

Tackle 25 Covered Calls Premium System. Covered Calls are ideal for your IRA and can help you compound those gains and generate cashflow. Click on the image to get this premium trading system right away.

Last update: August 2021

To every thing there is a season, and a time to every purpose under the heaven.

Ecclesiastes 3:1

Stock investors in search of superior risk-adjusted returns should embrace the covered call with vigor. It’s a strategy tailor made for the masses to deliver cash flow coupled with a dollop of downside protection. As outlined oh-so-meticulously in my recent newsletter covered calls dampen the volatility of portfolio returns which in-turn creates less emotion and ultimately, easier profits.

What? You haven’t read the newsletter yet? Do you not like happiness? Or is it enlightenment you shun? Neither one? Well, then click on the hyperlink above and bask in both.

Tales of a Technician: The Case for Covered Calls NOW!

One of the important takeaways was that covered calls underperform during raging bull markets while outperforming in every other market type: sideways, up a little, down a little, down a lot. To fully understand why we need only think about the structure of the trade. You buy 100 shares of stock and then sell a call option. By selling a call you are promising to sell your stock at a certain price in exchange for being paid a little bit of premium. The cash received provides both cash flow and some protection in case the stock drops.

BXM Chart

The promise to sell the stock caps our upside profit potential thereby delivering underperformance in times of extreme bullishness. The last few years serve as a perfect example. Feast your eyes on the following graphic which shows the performance of the S&P 500 (gold) versus a buy-write (long the S&P 500, short monthly covered calls) (gray). Notice how in 2013 and 2014 when the market was roaring higher the gold line soared while the gray line sputtered. That right there is the covered call underperforming.

But guess what happens after a long spurt of the covered call underperforming? The pendulum shifts and it begins to outperform. Why? Well, typically because the big run-up just experienced in stock prices is overdue for some mean reversion. In other words, the bull market is due for a breather, or, worse yet, death. In either case you’re much better off selling covered calls on your holdings than simply holding stock at that point.

Take a look at the S&P 500 and ask yourself which is more likely: stocks continue the torrid pace set over the past few years (see trendline) or they rise at a slower pace, travel sideways for a spell, or even retreat for a while.

SPX

My bet? The second group of outcomes. I think the bull is extremely unlikely to duplicate the last five year’s performance over the next five years. I know, it’s a lay-up, no duh, no brainer bet. We’ve already seen the pendulum begin to swing in 2015. I strongly suspect the outperformance gap between SPX and BXM (monthly covered calls on SPX) will continue to close in the years ahead. So if you’ve been tiring of limiting your upside by selling covered calls on something like SPY and are ready to give-up on the strategy – DON’T. It’s high time covered calls start to earn their keep. And to be fair, investors have seen the strategy finally start to pull its weight through much of 2015.

To be clear: there is no time like the present to begin selling covered calls on stocks in your portfolio. That’s if you concur with my previous comments, of course.

If you need an example, we’ve been tracking a monthly covered call in my trading lab (an hour of glory, fun, and profits delivered to your doorstep weekly) on QQQ. We purchased 100 shares on April 9th at $107.31 and sold slightly out-of-the-money covered calls each month. At the time of this writing (Dec 30th) QQQ is perched at $113.27 marking a $5.96 gain for shareholders (excluding dividends). That’s a 5.6% return – not too shabby.

By selling covered calls (8 in total from May to Dec), however, we scored another $5.38 per share along the way. Tack that on to the $5.96 gain and our total profit ex-dividends is $11.34. On 100 shares that’s a $1,134 gain on a $10,731 investment and translates into a 10.6% return.

With covered calls we doubled the performance of stock owners. Why the trouncing? Because the market was neutral. Like I said, the buy write has shed its underperforming ways and is ready to play catch-up.


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]

Beginner

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.

Read More »
Beginner

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

Read More »

Portfolio Protection For Beginners [Free Articles]

bear market survival guide
Beginner

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.

Read More »

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.


Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

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.

6 Replies to “Tales of a Technician: The Case for Covered Calls NOW!”

  1. DENNISJAMES says:

    Sounds good to me and I love the scripture reference.

  2. The stocks which I’m writing covered calls against are just being slaughtered during this major correction 🙁

    I chose fundamentally sound companies. Got downside protection with puts and the calls have nice returns. Gotta have guts to endure, I guess.

    (Love the first line sang by The Byrds)

  3. MattQuattrochi says:

    Good article, just started studying Covered calls so timing is perfect.
    Sorry though I didn’t see the link for your previous article

  4. FRANCISAMOO says:

    Great article and very educative. Thanks Tyler.

Comments are closed.

Chart Modal

Tackle Trading

Book a FREE Consultation

Sign up for a free consultation to build your Educational Plan.