Option Strategies

Go on any option site and you will find tons of option strategies; long calls, shot puts, spreads of all nature - bull, bear, verticle, calender, straddles and strangles and exotics like Iron Condors and Butterflies.

None of them will be discussed here (although I have a page about naked puts or turning them into a bull put spread). I am talking about "trading" the weekly or monthy covered call you write for income.

How Do You Trade Covered Calls?

Simple, covered calls don't have to be set and forget. If you understand the "personality" of your stock and know where on a daily chart the major support(demand) and resistance (supply) points are, you can buy back your calls on a dip, bank the premium and sell them again once they bounce off support.

My rule of thumb is if the call premium decreases by 50%, I usually take the cash. My first Finance professor always said " A dollar today is worth more than a dollar tomorrow."

A Major Caveat

One caveat; if the stock is melting down on news and the downward swing is harsh with momentum, there is a chance it may blast past support and keep going to a deeper level. If that looks and feels like the case, then keep the calls as they will probably expire worthless.

In this scenario, hopefully you have married puts in place for insurance. Once they kick in losses are mimimzed and you can exit the stock. If it does bounce back at a deeper support-demand level, you can buy back the stock at the reduce price, sell more calls and even buy some calls to spike the ride back up.

BIDU is a dream come true for the scenario. It can move $10 in a week, making all this scenarios profitable. As in any trading, KNOW your support and resistance levels with the stock AND the broad market so you don't get caught.

Good writing!