In Part One of Why Sell Covered Calls, we discussed what covered calls why investors choose to write covered calls to super size their portfolios.
For quick review, selling covered calls is the process of owning a stock (or longer dated call options) and selling call options to collection premium. For example, if you own 1000 shares of Microsoft and it is trading at $25, you may be able to sell the next month’s $26 strike price for $400, taking in $400 in premium, which is yours to keep no matter what.
If Microsoft is under $26 at expiration, you get to keep the premium and the stock. If Microsoft is at or over $26, then you must surrender your stock at the higher price. This probably will not make you feel too bad, since you can bank the $1.00 on the stock increase and another $400 on the premium for a total monthly return of 5.6% (not including commissions). Sweet, and covered calls are approved for retirement accounts.
The BIGGER Reason to Discover How to Sell Covered Calls
The bigger reason is Weekly Options! Weeklys as they are named are a license to print money and create weekly pay checks. First, go to the Chicago Board of Options Exchange (CBOE) and on the top navigation pane select Products, then Weeklys. From there you can get the current list of weekly options on stocks, ETF and Indices.
Weekly option selections may change because each exchange only gets five selections and their choices may change depending on trading volume. After all, this is a business. If no one is buying or selling a particular option, the exchange will replace it with another one.
The current list includes an all star line of stocks like Apple, Amazon, Bidu, Netflix, Price Line, Intel, Microsoft, Cisco, IBM, Caterpillar, Las Vegas Sands, Potash, Goldman Sachs, Freeport McMoran Copper, Research in Motion and many more. ETFs include SPY, QQQ, FAS, FAZ, GLD, GDX, IWM, USO, XLF, EEM and others. If any of these stocks are core holdings, then you can immediately start supersizing returns.
New Weeklys Every Thursday
New Weekly options come out every Thursday and expire the following Friday. During the last week of the month there are no new options created because the monthly options with all stocks that have options expire the following week. To get the maximum premium, it is best to write (sell) before Noon on Friday, and preferably on Thursday. With the Weeklys, time decay is your double-dutch friend. There have been times when options that were sold on Friday morning eroded more than 25% by the close on Monday.
A Variety of Strike Prices
Choosing strike prices is a whole lot easier using the Weeklys than monthly options. In this current volatile market, looking out to predict what the market may do over a month is like looking into deep space. With many options having $1.00 and $2.50 strike increments, and with implied volatility high (meaning high options premiums), the task is much easier over eight days. One nice bonus with Weeklys is you can sit out earnings week and let the stock run and not lose opportunity if the stock runs up. If the trend is down, you can jump back in and ell deeper in the money calls for additional downside protection.
Call and Put Credit Spreads for Even More income
Another use of the Weeklys to supersize even above using them for covered calls is to write credit spreads for income as well. If you own Las Vegas Sands and the trend is slightly up and no earnings announcement is scheduled, then in addition to the slightly out-of-the-money call you may have sold, you could sell a put one strike below a support point for additional income.
For example, say LVS is trading at $45. You could sell next week’s $46 Weekly call for $.80, and then sell the $43 put for $.40. This would be what they call a “naked” put in that if the stocks drop to zero; your risk is 45 points. To cap this, you can buy the $42 put for say $.20 for a net credit of $.20. With 10 contracts this is an extra $200 in your pocket and your risk is capped at the difference in the strike prices, which is $1.00, so $1000 on 1000 shares.
You can also sell calls in the other direction, sell the $48 call and buy the $49 or $50 call, again collecting premium, while controlling risk. If you were to write a call spread above and a put spread below, technically this is called an Iron Condor.
The complete spectrum of spread possibilities is beyond the scope of this article (and for many investors who just want some simple for extra income.)
For my own holdings, I sell covered calls and sell put spreads weekly for income. There have been times when the stock dropped and I chose to have the stock “put” to me, in other words I bought the shares. Many times, selling puts is a great way to buy your favorite stocks at a discount.
Using Weeklys, there is a strategy for every market scenario.
Tim Leary is a full time trader and writes (sells) covered calls, earning 3% and more weekly in bull and bear markets, with limited risk. To get a free 50-page covered calls report, click here.
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