Covered call selling (or “writing”) may offer  a relatively low-risk way to generate income on existing stock positions in sideways or range-bound markets. But how can you write covered calls most successfully? This post gathers several resources that will help beginning and more advanced traders write covered calls with greater success while understanding all its risks.

After my recent posts on LEAPS-based covered calls, I’ve heard from several readers asking for a one-stop-summary of all the educational material TradeKing offers about selling (or “writing”) covered call options. We really do offer several great resources on this topic, so here’s a handy primer on the subject.

First things first: let’s briefly summarize what covered call writing actually is. (You’ll find even more details in the Options Playbook under the Education menu. (Don’t forget to login first.) Covered call writing is Play #6.

Covered calls involve selling (or “writing”) one or more call options on a long stock position you already hold. To count as a “covered” call, the option you sell shouldn’t represent any more shares of stock than your existing long position. (This is a crucial point, as you’ll learn below. If you sell more options than you’re holding in long stock, that’s considered a “naked” call sale and a LOT more risky than the covered call strategy.)

For selling your covered call, you’ll collect a premium. Covered call writers are often hoping to earn a little income on a stock that’s likely to stay flat or drop slightly in the short term. In that scenario, option buyers won’t be tempted to exercise their option and “call” away your long stock from you in a process known as assignment. In this case your maximum potential profit is limited to the strike price minus the current stock price plus the premium received for selling the call. 

You may also sell a covered call if you want to sell the stock while making additional profit by selling the calls. In that case you’d want the stock to rise above the strike price and stay there at expiration. That way, the calls will be assigned.
 
However, you probably don’t want the stock to shoot too high, or (wearing your long-stock-holder hat) you might be disappointed that you parted with it. As for your maximum potential risk, you’ve received a premium for selling the option, but most downside risk comes from owning the stock, which could potentially lose its value. However, selling the option does create an “opportunity risk.” That is, if the stock price skyrockets, the calls might be assigned and you’ll miss out on those gains.

Those are the basics of covered calls. To refine your approach, check out my blog series 5 tips for successful covered call writing (part 1, part 2, part 3, part 4). The fifth post in the series explains buy-writes, a related strategy. There’s also a bonus post to the series, about why and how to choose a medium-volatility stock for your call-writing.

You may also want to download our Intelligence Report 5 Tips for Successful Covered Call Writing (PDF) for an even more detailed exploration of the subject.

If you’d rather plug into a video over lunchtime, head over to Education > Resources and choose Video. There you’ll find a video on covered call writing. You might also want to check out this archived webinar.

Even though covered calls are seen as a relatively low-risk options strategy, that doesn’t mean they’re zero risk. The All-Stars blog highlighted some risks of the covered-call strategy. This post continues that discussion.

If you’ve already written covered calls and are looking to refine your approach, you might appreciate this post from All-Star commentator Mark Wolfinger. In it he points out that writing covered calls for very small gains may not ultimately be profitable. Another All-Stars commentator Doc Maher explains here why covered calls often use short-term options. Meanwhile, this webinar archive shows you how to “roll” covered calls – although, keep in mind, rolling can compound your losses, so proceed with caution.

There’s even more great info if you search for “covered calls” on our Trader Network, but these are my favorites on the subject. Let us know if you’ve found other reads to add to this library – it’s definitely a popular subject that other folks are eager to share resources on.

Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com

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