Writing covered calls is a low-risk and rather simple options strategy—but for all that, it tends to be misunderstood.  If you’re using the internet to get a handle on the covered call (or “buy write”), you’ll likely find one of two scenarios.  The first, frustrating for the new investor, is a variety of articles that use language the rookie will misunderstand.  You might find, on the other hand, that viagra a more experienced investor, covered call articles don’t offer a range of tips for maximizing profit. 

I’m not an expert by any stretch, but I am a reasonable person with some stock knowledge and time to research.  This step-by-step is intended to guide the novice through the process, but also to provide tips for the seasoned investor, and links to further information.

The basics.  To explain what a covered call is, one must understand the basics.  A call option is the chance to buy a stock by some determined point in the future.  If you buy (or pay the “premium” for) call options, and the stocks for which you own options rise in price, you can buy them by that date.  That takes care of buying options.  The flip side of the coin, of course, is the higher-risk options selling.  If you sell call options at 50 and they go up to 100, you are obligated to sell the stock to the buyer at that price.  While this is bad enough even if the seller owns the underlying stock, it’s even worse if he does not—he will have to buy the stock on the market and sell it to the individual who bought call options.

What is a “covered call?” In the instance of the seller losing money, the risk is unlimited.  In the unlikely scenario that a covered call is bought for $1 shares that rise to $500, the seller is out of luck.  Selling covered calls offers protection against such a scenario by owning the underlying stock for which calls are being sold; hence, the seller is covered against inordinate loss.  A covered call simply refers to the transaction that takes place when you sell calls for stocks that you own.

Writing covered calls. In order to write a covered call, you will need to own at least 100 shares of a stock.  You can own more, but call options are sold in sets of 100, so even if you have 199 shares, you will only be able to write one covered call.  One more share and you can write two.  The sale of these options, as mentioned above, is known as “writing a covered call.”  If you are successful, you will collect the premiums for the calls you’ve sold, making profit on stock in your portfolio.

Now that we’ve covered the basics, let’s move to strategy.  These are some of the most attractive points I’ve taken from various links, which you can check out on your own for more information.  Remember, the covered call game truly is one of strategy, and by implementing the ones that work for you, you will maximize your profit.

1. Don’t chase pennies.  Mark Wolfinger of TradeKing offers his wisdom, cautioning investors against low earnings from being too conservative in their covered call writing.  While his thumbs-up position on writing bullish covered calls is uncommon, he explains his reasoning behind encouraging such options sales. Selling options sooner rather than later on stocks that seem to be rising will allow the investor to make money on the time premium.  His strategy makes good sense, considering there is money to be lost if calls are exercised, and that risk is not worth a pittance in short term profit.
2. The BXM Strategy. Unsure about covered calls?  Well, the buy-write index (BXM), which has only been around for a few of years, demonstrated after the market crash the success of a covered call strategy relative to the market as a whole.  Brett Arends of the Wall Street Journal believes that buying funds which pursue buy-write strategies is a good long positon.
3. Pursue good premiums.  Although this article might seem a bit cursory to the experienced investor, its point is valid.  You’ll maximize your covered calls if you can make consistently good premiums.  The folks at Optionistics discuss determining the best premiums for writing covered calls, and offer a report to help you make the right decision.
4. Roll covered calls.  For the adventurous investor, the riskier prospect of rolling covered calls might be a good choice.  Rolling covered calls refers to closing options on one position and opening different options on the same stock.  Rolling can be more profitable than other strategies, but may deal the covered call writer greater losses, as well.  TradeKing has a webinar on the same subject.
5. Capture dividends.   Even if profit and loss cancel each other out, you can make money qualifying for dividends by writing “deep-in-the-money” covered calls.  Collecting dividends on a covered call is explained in this easy to understand article from The Options Guide.