Covered Call Writing

 
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Call Strategies

Call StrategiesThere are many call strategies for writing (selling) call options. In every scenario, the key is to understand the current trned of your stock, trend of the sector it's in, the stock's rank in that sector (top performer, laggard) and what the broad market - S&P 500 and the DOW are doing.

In a perfect world, the holy trilogy of call writing is stock, sector and market all trending together.

 

If the trend is up, the next step is to gauge where the stock can move. You can check the Average True Range (ATR), a study on most chart platforms, even the good free ones like Stockcharts.com. You can check the ATR for the week or month and then decide on how near, at or out of the money you feel comfortable writing.

On a stock like Microsoft, with no earnings in sight, a slight uptrend and a monthly ATR of about $2.00, you could sell a near the money call for maybe $.80 and let the time erode the premium.

If it is in a slight downtrend and moving down toward its 20 day moving average, where it has bounced back in the past, you could sell an at the money call or maybe go a little deeper in the money to pocket premium and also give you some downside insurance.

One of my favorite call strategies on an uptrending stock is to sell the call and then sell a naked put or if the stock is really expensive like Bidu, use a spread to limit the margin requirement. All that means is that if Bidu is trading at $110, I sell maybe a $115 call for around $4.00 and then to super size, sell a $104 put (several strikes under support) for another $3.00 in premium, and buy the $99 puts for $1.85, netting a total of $1.15. My risk is capped at the $5.00 spread between the $104 call and the $99 put.

If the stock tanks, I would actually like to buy Bidu at $99, so that's fine. If I didn't, well just buy the put back and you probably more than broke even because you will get full pop on the $4.00 call sold.

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