Investors who use covered call trading strategy own the underlying stock and then sell a call option for each one hundred shares that are held. This strategy is also known as the buy-write strategy, when the investor first buys the stock and then sells (aka ‘writes’) the option in a trade.
This strategy has proven to be an efficient way to gain money from your stocks, but there are still strategies that you can use to further increase your income and that go beyond simply hiring a covered call advisor to help you along.
Here are the top tips for writing covered calls:
Select Stocks That Are Highly Volatile
While you would be inclined to believe that selecting stocks with lower volatility would be wiser because they are easier to handle, the truth is that low volatile stocks also have lesser premiums, so it will be more difficult to gain more money.
In contrast to this, stocks with higher volatility also have higher premiums as well as higher liquidity, and can potentially gain you a thirty percent return or more each year.
Minimize Risk and Maximize Income
This is the basic goal of investing in anything, right? The same goal most certainly applies to covered call investing as well.
The best goal to maximize your income from covered calls is to try to extract a minimum twenty percent annual return on your shares value held in your portfolio, which is certainly possible even for the new investor.
Make Sure Your Portfolio is Diversified
Making sure your portfolio is as diversified as it can be is another great covered call strategy to use. The smart covered option writer always has a large number of common stocks in his or her portfolio. Going back to our strategy of maximizing reward while minimizing risk, diversifying your portfolio is one of the very best things you can possibly do to keep risk to a minimum.
Think about it this way: if you only have one kind of stock and the performance of that stock suffers, then your entire portfolio is adversely affected and you lose money. But if you owned other kinds of stocks, then you still have other options to fall back on.
Favor Stocks That Are Lower Priced
The best stocks for you to invest in will be ones that have a lower price of ten to twenty dollars a share. These kinds of stocks tend to have a much higher premium in comparison to stocks that are worth hundreds of dollars a share.
Ultimately, you’re likely to gain a greater return on your investment is you purchase a thousand dollars’ worth of shares worth ten dollars each versus purchasing a thousand dollars’ worth of shares worth a hundred dollars or more each. Selecting stocks that are even worth less than ten dollars a share would be more preferable.
Writing Covered Calls
Overall, these are the top tips and strategies that you should follow when writing covered calls.