This Covered Call Management Lesson saved me $10,000s

Don't want to read? Checkout the video version:

If your goal is to collect income from selling options then you are going to want to understand a few key points


  1. Sometimes the best thing to do, is to do nothing. (Hint: wait for the market to swing)
  2. Adjustments can lead to a higher return on investment
  3. In many cases, setting a goal of less income, but higher probability may be better.

The video above addresses the first point, in detail, but I will cover it here as well and the additional points

Sometimes the best thing to do, is to do nothing

As a covered call seller, you might get a bit anxious when your stock starts to go below your purchase cost. For me, this sometimes felt embrassing because of the excitement of selling call, collecting the income, and thinking of all the future premiums to collect. But dissapointed once I do the math and now realize that I am losing much more from the stock going down.

FIRST OFF, be okay with that and actually realize that you are now out performing that stock.
You would of been worse off by doing nothing, so congrats!

SECOND OFF, you should ask yourself a few questions, such as:

Question 1: Is your goal to own this stock for the long term?

If your goal is to own the stock for the long term, because you are interested in capital gains or maybe also the dividend, then it just would not make sense to try to sell calls when you have a risk of selling your positions at break even, or even a loss.
You believe in the stock, so sometimes the best thing to do, is just take a break from selling calls and wait for the stock to rebound. You could sell calls at your target price, but you may be collecting pennies, which if that is okay for you then great!

Question 2: Does this stock (or index) have a history of performing well?

This is a no brainer if you are trading covered calls on index that track the S&P 500 or NASDAQ 100.
These assets have a history of going up in price, so if that is the case, does it make sense to collect maybe 1-2% in premium at the risk of the index historically performing a 9% return?

Question 3: Is the stock tanking? or is the market just correcting?

If you are trading an invidual stock and not an index, you should do a couple things. First off, zoom out. See how your stock compares to the overall market. Second off, check how your stock is doing compared to the overall market. If the market is correcting and so is your stock, there is not much to worry about, it's just a typically market correction.

These questions are important because after asking yourselves these and thinking through, you may just realize that the best thing to do, is just wait it out before selling options.


Adjusting call options to maintain consistent probability

A strategy to implement is sticking to your same probability of profit. What this really means, is you will adjust down. Yes, you will be making a less max profit, but investors who possible want to get out of the stock anyway, possible because they are already close to their target price.

Here is an example

  • You bought XYZ stock at $125, 1 month ago
  • The stock has risen to $130, so you sell a 1 week call with a strike price of $135 and collect $50
  • All of a sudden the stock corrects to $120, your 2 week option is now worth pennies.
  • You use an options profit calculatorand find out that your call option now has a 90% chance of expiring worthless, but it started off at 75%
  • You then play around with the options calculator and find out you can sell a $125 strike to collect $50 again, this option also has 75% chance of expiring worthless.
  • So now, you should be maintaining the same return on investment, however you are limiting your max profit

Writing LEAPs for a roll out strategy

An interesting strategy to implement if you really want to collect income, but also want to keep at your target price. Is to far out in time and sell a 6 months, 1 year or maybe even 2 year call option.

This won't give you a high return on investment compared to selling weeklies, but it will give you the most amount of income that you could get in exchange of sticking with your target price.

This can be great for investors who want to keep it passive

Here is an example

  • You bought XYZ stock at $100, 1 year ago
  • The stock has risen to $130, so you sell a 2 week call with a strike price of $132 and collect $300
  • All of a sudden the stock corrects to $120, your 2 week option is now worth pennies.
  • You check an options chain and realize you are going to be getting little income for selling any short term options at your $132 target price
  • You find out, that a 1 year leap is trading for $4.00, so you sell it and collect $400.

To visualize your covered call strategy, head over to our Covered Call Calculatorso that you can see your max profit, compare strike prices, see probability of profit and all other important factors when making an options trade.

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