When to place a covered call

When to place a covered call?

  • Price made a higher low at support and is turning up

    Votes: 0 0.0%

  • Price made a higher high, but has not yet turned down

    Votes: 1 6.7%

  • Price made a higher high at resistance and is turning down

    Votes: 5 33.3%

  • Price made a higher low, but has not yet turned up

    Votes: 1 6.7%

  • None of the above

    Votes: 8 53.3%
  • Total voters
    15
D

DrPepper

I am learning about options and am trying to clarify the best time to place a covered call when I already own the underlying. I would appreciate responses from anyone who trades covered calls on either stocks or futures profitably. See the chart below for the numbering.

Is it best to place a covered call when price:

1. Has made a higher low at support and is turning up.
2. Has made a higher high, but has not yet turned down.
3. Has made a higher high at resistance and is turning down.
4. Has made a higher low, but has not yet turned up.
5. None of the above

Thanks for your input!
 

Attachments

5. Because it's impossible to put an easy set of rules to follow.

Also, you haven't mentioned volatility levels.
 
You might be better off asking when should you not use a covered call as this is more likely to keep you out of trouble.

One instance: just before major news releases and/or earnings (I'm thinking of pharmaceuticals prior to FDA or things like RMBS with lawsuit decisions or things like that)

Anyway:
I like to use covered calls on dividend paying stocks of reasonable price (say $10-$40). I'll sell a portion of the calls right away (say 50-60%) and then use a tight stop near recent support to sell the remainder. This way you might happen to catch a big run up and so you're not limited by all of your calls but if it hits your stop, you're basically back to square 1 and you've only lost out on a little bit of premium. You only need to get one runner to make up for a lot of stops. I use ATM or slightly OTM and usually go 2-4 months out...
I've used this with pretty good success on things like ERF and PGH which pay monthly dividends.

My $0.02
 
Thank you for the responses thus far.

In order to clarify my question, assume that volatility is similar at all 4 points on the chart, that there are at least 3 weeks until options expiration and that no earnings reports are due.

I realize that there are a lot of variables involved in writing a covered call, but I am trying to focus on only this one aspect of covered call writing. That aspect is, at what point on a wave in an uptrending market is it best to write a covered call and, even more importantly, why?

Thanks again.
 
Quote from TheGoonior:

You might be better off asking when should you not use a covered call as this is more likely to keep you out of trouble.

One instance: just before major news releases and/or earnings (I'm thinking of pharmaceuticals prior to FDA or things like RMBS with lawsuit decisions or things like that)

Speak of the devil, I have a small buy-write on in RMBS right now.
More...
 
When I used to do these trades, I would buy on significant pullbacks. Not only do you get in at a better price, but the IV was usually higher which is good for selling options. Of course, you would still have to be neutral or bullish on the stock, based on technical support or fundamentals.
 
As mentioned in the article, it's good for building a position on things you don't mind holding and want to average down in anticipation of longer term appreciation.

One variation might be to allocate only a portion of your purchase to the puts to give yourself more protection in the event something catastrophic happens. For example, if you would like to pick up 400 shares at $20, sell 2 of the OTM puts at the strike of $20. If you aren't assigned, you reduce your cost basis somewhat. If it meanders down to $20 and you are called away, then you can always purchase the additional 200 shares at the market. If, however, it gaps down to $15 and still meets your holding criteria, you can split the difference and have 400 shares at an average price of $17.50 versus 400 at $20.
If it doesn't meet your holding criteria, then at least your loss is reduced.

My $0.02.
 
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