The last post in this series explains a strategy related to covered call writing, called a "buy-write". (If you haven't already checked out the rest of this series, definitely take a look! We've defined covered call writing, talked about volatility and assignment, prepared a plan in advance if the stock goes down, plus explained the difference between "static" and 'if-called' returns.)

Tip 5: Consider buy-writes.

If you're attracted to covered calls as an ongoing income strategy, you can buy the stock and sell the call option simultaneously, in a single transaction. This is called a buy-write.

Buy-writes work best when you're bullish on the stock, but looking to generate some income in the meantime. Since you are selling the covered call, there's a definite chance you could lose the underlying stock if you're assigned, so make sure you're comfortable with that before proceeding.

Buy-writes offer more than just a convenient way to execute two strategies at once. First, you minimize your market risk by not legging into the strategy. "Legging" into a buy-write means executing one part, or "leg", of the strategy, followed by the other. For example, if you purchased the stock first in one order, then wrote the covered call directly after that first order, that's legging into a buy-write trade. As you may know from bitter experience, a lot can happen between the execution of your first order and your second. Entering a buy-write using the TradeKing buy-write trading screen minimizes the chances of market conditions changing quickly on you between trades.

Buy-writes may also attract fairer prices from market makers, since the offsetting position gives the trader a hedge. So, if you're planning on executing these two strategies as part of your larger plan, it's beneficial to do so in a single transaction, since you may actually get a better price for your stock.

Folks, it doesn't have to stop here. If you've got a practical tip or two you've learned from writing covered calls, don't be shy. I'd love to gather your "lessons learned" here, so that other new options investors can benefit from your experience.

Regards,

Brian (OG)

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

I'd sooner enter a long position before writing the call. If your very bullish on a stock, it's better to enter early and wait until a prior resistance level is met and weakness is indicated by the TA (candles). At this point, you'll tend to get the best premium considering price variation has driven up option prices. . .then write the call prior to retracement.
This yields higher returns and minimizes the potential of being assigned. This assumes a relatively low DTE (maximize time decay), you'll achieve better premium returns and capital appreciation by staying long the position.

The call writer must be well versed in TA to achieve this strategy, yet over a period of months 25-40% can be obtained on top of capital appreciation.

EWF

How do you protect your downside risk with covered calls? What do you think of protective puts?

Thanks for commenting EWF.  As far as the "best" way to trade, either as a covered call (buy stock and then sell call later), or via the buy-write (all in one trade) - there is no "best" way they are just different. It is fine to buy the stock first and then sell the call later because of a technical pattern. My guess is that out of the buy-write or cover call (buy stock now and sell call later), the covered call is the most common way for individual traders to trade. It just kind of makes more since to buy a stock and then when it gets to a certain price sell the call and hope to sell the stock at the strike. It sounds like you have and excellent plan and that is one of the most important things when trading is to have that plan and stick with it after the trade is placed.

Regards,
Brian (OG)

Hello Stan,

Protective puts are an interesting trade, just different. If you do own the stock and buy a put and then sell a call that is called a collar. I have a post of collars that you might enjoy reading.

Regards,
Brian (OG)