I'm thinking about writing (is this the right word ) covered calls.

I understand the basics of this but I'm not sure about the best strategy.

I have 2 accounts.

My brokerage (taxable) account is primarily dividend stocks that I rely on for monthly income. There is quite a range of stocks in this from things like NLY with a high dividend to AAPL with a smaller dividend. I average about 4% on this portfolio.

I also have an IRA with a range of stocks from speculative to large cap growth. I'm overweight AAPL/GOOG/MSFT/AMZN but I have some more speculative growth in this.

I know that I'll be hit with short term capital gains tax on the brokerage account but I've also been of the mind that if you're getting taxed, you're making money. However...., maybe it would be better to just stick with doing this on the IRA account?

I'm also wondering about how to possibly time selling the calls on my dividend stocks based on ex-dividend date, or do I not really need to worry about this?

I have no idea what a proper strategy is. Sell more the higher out of the money and make less but keeps it safer from having to sell the stock? Longer or shorter times? I understand that if I employ this there will come a time when the call is executed and I can live with that but I really don't want to be buying and selling a lot. I'm willing to make less to avoid a lot of this.

Thoughts on this?

I think some people mistakenly sell covered calls because they haven't done the stochastic calculus to see that the sum of all the premiums they ever earn will be offset by the large gains they sacrifice in the rare circumstances where the options end up deep in the money. However if an investor's risk preferences strongly favor small and steady gains over large and rare ones then it might make sense to transform the payoff function in this way.

I regularly sell covered calls.

Generally, I make money on doing so.

Sometimes, I make a tremendous mistake, and will sell calls that prevent me from making the run up in the stock price.

HOWEVER, over the long term AND factoring in all the trades, I've made money doing this (even accounting for the odd trade that goes bad).

Stocks with high dividend payouts, TEND not to have good/high option premiums on them. However, if you do it right, you don't need to make a ton. For example, you've got a stock with high dividends trading for $8 & change. Sell $10 calls 4-5-6 months out. You aren't looking to make a huge score here, just raise your income level a couple/few percentage a year. You also get the high dividends.

From time to time, I will have a stock go ABOVE it's strike price. If that happens, I will try and wait it out, and let the time premium decay. If I still like the stock, I'll "roll" the calls. That is, buy back my open position (maybe take a loss)...then immediately sell more covered calls at a higher strike/further out in time. This has worked out well a few times.

The best covered calls I've ever done have been in GES. A while ago (18 months?) the stock was trading in the 4's! Earnings were coming out that Friday (this was tues. or weds.). I bought GES shares at like $4.85/share. Earnings come out, and they are GOOD. The stock goes bananas and MORE than doubles the next day! It is over $10/share. I then sell the 12.5 calls with 4-5 months till expiration. I sell those calls for almost $4.50/contract! That brings my cost basis in GES down to WELL under $.50/share. This is also incredible, as I've gotten back almost all the capital I used to purchase the stock, and re-deploy into other ideas. I've also got upside till $12.50. They expire, so I pocket all the premium.

Time passes and I wait a little bit. GES starts going back up and I sell calls again that are shorter dated. When you factor in that premium, my cost basis is now solidly NEGATIVE. Those options expire worthless. I do it again. This time, the stock blows through the strike price. I wait, and then by them back. Lost a bit on that trade, but I still own the stock. GES has resumed dividend payments. It is now well over $20/share. GES is earning a TON, and only trades for like an 8 forward P/E so I'm not writing any calls on it, as I think it is massively undervalued. If it goes over $30/share, I'll consider selling more covered calls.

It also helps if you are selling calls on positions that you've got massive gains in. If it gets called away, oh well, you've made your $$$.

In the future, I'll be learning more about writing covered calls and doing it more. Just a great way to reduce risk, increase liquidity, and add a few points of pretty safe return to your portfolio.

I’ve only started doing this the past couple years, so take it with a grain of salt, but I think the one thing you’re trying to minimize happening with covered calls is the stock blowing past your strike and all of sudden you’d need to spend 500% of your premium to buy it back, or lose out on all those gains.

So with that in mind, a couple things I’ve tried to do are.
-Don’t feel obligated to sell another call after the first one expires. It might seem totally safe to just kept going 15% above current price every month and repeating, but eventually you’ll get blown out and it’s all for nothing. Think about what you’re happy with each time, and if it’s not there wait a while and see how it moves before selling.

-Consider just buying it back if the price ever drops to like 20% or less of what you sold it for. It doesn’t feel great psychologically, but if you think about it as making 80% it cuts down the chance you get stuck in a bad spot.

-if you’re in anything that is very volatile, just don’t do it unless the price spikes massively. It might seem like you’re getting a lot, but it’s just not worth it for something that you’re looking to hit big on.

-Agree that the best stuff to sell calls on is long term holds that you’re happy to get out of anyways. Like right now I have a decent amount of XOM that I feel like has kinda run out so I’m happy to sell calls bi-weekly just a dollar or two above the price and get like 40 bucks a week on each one cause I’d be ok with selling it now.

Overall, if you start thinking of it as easy guaranteed $ instead of something you also have to think about, you’re gonna have a bad time.

You can do the standard 45 days out and be pretty conservative on the strike and close at 50%.

First thing to understand is that a covered call means 100 shares to 1 call contract (which is 100 shares). If you have 100 shares of both AMZN, GOOG, etc, congrats. Otherwise, it's not a covered call

You should be selling out of the money 30 to 15 delta. Obviously its a long position so if you're not bullish or looking for just premium, this isn't the best strat. My advice would be to stay mechanical. Learn about smile, decay etc

A basic strat. Sell a 30 delta call 45 DTE. Roll out in time at 15 DTE to another 45 DTE. This is a mechanical and strategic way to collect premium, benefit from decay, and have room for the stock to run

Adjustments. If the stock goes down pick a value for the call to either roll down or out in time for more premium. If the stock price breaches your call strike on the way up you are no longer benefitting from the strat. Close the call and open a new call at 30 delta and perhaps out in time.

I suggest you pick a strat and try to stay mechanical. Backtesting does show you can you can increase returns while reducing portfolio volatility. Use liquid underlying/options. 20 cent bid ask spreads on options for a 30 dollar stock is bleeding value

Thanks Juan. Good advice. I dipped my toes a bit on Thursday but the market was so bad on Friday I decided not to do anything more.

I think I went a little too conservative. Most of what I did had 2-3 week expiration dates so I think I'm not getting near the premiums that I would be if I went with your suggestion (30-40DTE).

I've watched a few vids and most of the guys are saying that you just have to be prepared to have shares called at some point in time. I'm ok with this. I also need to figure out how to roll down/out.

Vanguard has a crappy interface for all of this, but that's where the bulk of my investments are. Fortunately I also have a schwab account so I can see everything I need to see, then go back to vanguard and do the transaction.

Edit: I don't see any way in vanguard to buy to close/sell to open in one transaction. I'm assuming this is possible on other platforms?

There's nothing magic about rolling. It's essentially closing out your position and opening a new one.

And yeah Vanguard sucks for options would not recommend. It's for 401ks and mutual funds that you don't touch.

You want to sell covered calls on stocks at the top of the range as stocks range 90% of the time. Here is an example on PLTR

https://www.tradingview.com/x/NXgkGuqI/


The VAH - Value area high - is a good place to take profit or sell a covered call or short (I usually don't short stocks)
The VAL - Or Value area low is a good place to buy, sell a put.

The POC - point of control is a take profit area too if you are long or short.

Stocks will generally bounce between these 2 areas for a long time before breaking out to the upside or downside. You will get around 9 - 10 good trades before a break out usually.

This has been an absolute disaster. I'm done. First three covered calls - AAPL, ABBV, and KO. All rocketed right after I sold the call.

The worst part is the emotional part. Watching me make one bad decision after another. It's a tiny portion of my portfolio, and my overall portfolio is doing quite well, but this is just been eating me up.

Pretty much why I gave up trading a long time ago. I should know better.

Sounds like the bigger boat is gonna have to wait

Hehe...

No need to wait.

Curious to know what happened

Like for AAPL, at what stock price did you sell a call? What call strike did you sell? What did you do when the stock breached the call strike? etc

Covered calls are a bullish position that caps your upside profits as a tradeoff for the benefits. If a bullish position going your way puts you on tilt like this then trading is definitely not for you. I wouldn't really consider selling calls against long term holds trading though

Try QYLD. For those who want the income, don't want to trade, and accept the risk of a strategy like that. The expense ratio (.60%) isn't bad compared to the random mutual fund companies offering the same thing.

QYLD • NASDAQ
Global X NASDAQ 100 Covered Call ETF

I sold the 172.50 aapl (12/10) calls on 12-2. I believe the price was around 162 maybe? It immediately ran up to, I think, about 175. I sucked it up and bought them back. I couldn't get myself to let it get called. ABBV was even worse. The day I sold them it went on a tear.

Had to sweat my T calls expiring today since Morgan came out with a buy yesterday and Cramer is turning the corner on them. I think I'll be ok but damn it seems like I have the absolute worst timing.

Yeah, trading is not for me. I already knew this but it seemed a somewhat safe way to make a little extra on my portfolio.

Very interesting. I might pick up a little of this. Thanks!

You completely ignored proper set-up or mechanics. If you scroll back you were advised to either learn about volatility decay and smile. Or you could have just skipped straight to the resulting strat presented. Sell a 45 DTE call ranging from 30 to 15 delta (pick one and stay mechanical) then have an adjustment plan (pick one and stay mechanical)

Right now 42 day to expiration calls in AAPL are 182.5 (30 delta) selling for around $3.75.

Some rough estimates might make it more clear. On 12-2 the 30 Delta calls would be around the 175 strike and the closest to 45 DTE (days to expiration) sell for about $3.75. That would be Jan 21. That trades for $5.00 today. In 2 weeks you would be set to roll those 175 calls unless your call strike is breached (175 + $3.75 credit collected). Right now the Jan 175 call strike trades for $5.00 and the Feb 185 calls sell for about $4.50. You can kind of extrapolate the value and premium rolling out in time. You continually give the stock more room to run and collect more premium. Sell 45 days expiration, roll out in time at 15-21 DTE (pick one stay mechanical) and keep collecting premium.

Hopefully that helps you (or anyone interested) understand actual proper covered call strat and mechanics. You go out in time to where the stock has room to run and the calls will be starting to decay relatively quickly. If you applied the mechanics I described in my prior post you would have had zero stress, capitalized on the rip, and be set up to collect a bunch more premium if the stock cools off and hangs out here.

Hopefully that makes sense. I can't be bothered to proof read and tidy it up

Great post, thanks

Thanks Juan.

I feel like that's a 20 minute video on brain surgery. I get the premise but I'm probably going to get lost in the details. However, I'll play around with this with one call on one stock. I might have some more specific questions later.

You want to be selling stocks when they run up like that - especially AAPL which is over priced. I sold all my AAPL at $165 so you're doing better than I am.

I was pissed when I sold my SHOP at $1550 and it ran up to $1650 - but I knew it was at the Value area high, and it dumped so I could pick it back up $200 cheaper.

Just don't put it in your taxable account. The majority of the dividend/income is counted as return of capital by the IRS.

It's actually simple and once understood becomes intuitive. Maybe next time try to set it up and then check back in here before the transaction. The basic strat was laid out to sell a 45 DTE call at 30 delta. Roll it at 21 DTE back out to the monthly expiration closest to 45 DTE. You sold a 7 DTE call which is something you were never supposed to be holding at any point. The set up isn't more complicated than cooking a frozen pizza. There's time and temperature. Follow the instructions (stay mechanical)

That's trading and 99% of people that think they can time the market are wrong. The rest might be lucky

That's what my brain surgeon said.

Dipped my toes.

Sold the 1/28 18.50 SOFI calls for .63. .27 Delta.

I picked this one primarily because it's green for the day and it's in my trading account. I'll keep an eye on this one before I do much else.

Question about pricing.


Most of the 44 day out calls that I'm looking at now have enormous spreads. A lot of the 15-30 delta don't even have bids. Is there a rule of thumb on what I should ask for these. Like putting out a limit order that may or may not be filled. Is there some sort of percentage of share price or something that I can kind of ball park?