Hey everyone. My situation is a bit complicated as I am medically disabled and need to generate an income in the safest manner possible. I was fortunate to inherit an account with interactive brokers with about $300k in it. I am intrigued by selling covered calls for income. I am wondering what the best method might be to determine the calls I want to sell. I really am not worried about having my stock sold as I do not have much confidence in this market. I am hoping to find the most effective ways to determine which prices to sell. I am planning to sell calls with 30-60 days left until expiration. It seems like the biggest risk is that a stock pops to the upside and I lose the premium plus am forced to sell 100 shares of whatever, correct? My method is very good at determining areas where the market is in an equilibrium where no major moves are likely. I do not know much about options but is there anything else I should look at, like delta, gamma etc?
Best way to pick strike price for covered calls?
- Thread starter spinn
- Start date
Robert Morse
Sponsor
The "biggest risk" is that you choose stocks that go down. This is not a safe strategy for someone that actually says, "I do not have much confidence in this market."
I already own the stocks I will be selling covered calls against. They were placed in a portfolio I had no control over, until very recently. I do not want to sell them until at least January but want to try selling covered calls for a few weeks before I sell them, if I even do sell them.
Robert Morse
Sponsor
You should hedge at the same time if you REALLY want to generate some income by selling covered calls. That way you will be protected against the potential downside risks and at the same time generate some income. If I were you, I would invest that $300K savings in a term deposit. Imo it's quite imprudent in investing in stocks with funds that you are completely dependent on for day-to-day living as well as possibly healthcare especially in a portfolio that you have no control over.
That could be a real possibility given that the symptoms from this omicron variant are "mild" and there are real inflation risks that quite a few fed governors have raised concerns about.
Pick the stocks you're most likely to sell in Jan and sell Jan ATM calls against them.
Example:
Long 100 shares MSFT (currently 343)
Sell Jan21 345 Call for 9.30 ($930)
You keep the $930 regardless of what happens to the price of MSFT.
If MSFT closes above 345 on Jan 21st your stock (100 shares for each call) will be called away (sold).
If MSFT closes below 345 on Jan 21st you'll keep the stock & keep the $930. You can sell another ATM call for Feb. Repeat until sold.