Covered Call Options Explained

Trading a Covered Call options could be a great way of generating monthly income.
Have you ever bought a stock and held on to it when it went up in price, and then it just went sideway not doing a lot,or even worst, it went down below the price you paid for!? Ouch! Sounds familiar?

As you can see from the above chart, it's not doing too well when you bought the stock @ $ 27 and held it for almost a year.

Rather than selling the stock out of frustration for a small gain or loss, use a covered call option to sell a CALL to expire at the end of month for which you will receive a small premium regardless whether it will be exercised and you will be covered.

Here Is How To Generate Monthly Income The Low Risk Way?

Look for a stock that is in a trading range where there is a clear area of support and resistance level like the above chart.

This stock is bouncing off the $27 support line and currently trading @ $ 28.8

• Buy the stock, say minimum 100 shares if you don't own this stock
• Sell Out Of Money Call($ 30- strike price) to expire next month or this month if trading on 1st week of this month.

You will receive a small premium which is automatically credited to your trading account, which at the time of writing is $ 0.95

Your profit in percentage excluding commissions would be:

(gain in stock price + covered call options premium received)/cost of stock x100

Scenario 1 Stock price is now more than $30 at expiration day and the shares you bought would now be sold @ $30.

Your profit,is 30-28.8+0.95= 2.15 per share or $215 per option contract, or 2.15/28.8 X 100% = 7.46 % gain excluding commission. What you can do now, is either buy the same stock to sell another Out Of Money CALL @ $35 next month and repeat the same process and get paid, or look for another stock with price just bouncing off the support lines.

Scenario 2 If stock price does not goes above $30 when the option contract expires at the end of month worthless and you don't need to sell the shares, and your profit excluding commissions is 0.95/28.8 x 100= 3.3 % which is more than the interest from a bank!

What you can do now, is to sell another Out Of Money CALL for next month and repeat the same process and do the same calculation. With this option, you will eventually pay off the cost of the stock!

If you are a bit conservative,you can sell In The Money Call $25, in case it drops pass the support line and to the next support/resistance line.

Profit if exercised=options premium received- loss in stock price/cost of stock. If not exercised= option premium received/stock price. You can calculate all these potential profits before placing a trade.I look for 3 % or above.

Note, I use this stock to explain this technique only and it's not a recommendation to buy or sell this stock .Conditions might have changed by the time you read this page to make this stock unsuitable for this strategy.

How To Find Covered Call Options Stocks To Trade

You use technical analysis filter to scan stocks to trade. The one I used before is Telechart/Worden and the first 30 days are free. Here are my stock scans setting if you want to use the software.

If you are interested in following other experts and work from a list of stocks to trade using this strategy, I suggest you give this site a try.
Click here for a free covered call trial list of stocks