To locate a covered call, simply follow these rules:
1. Search for either a range trading securities market or a bullish trending market where you expect a steady rise in the price of the underlying stock.
2. Study the options linked to the stock to make sure there is enough liquidity.
3. Evaluate premiums and strike prices for call options no greater than 45 days to expiration date.
4. Check implied volatility on these options to ascertain whether they’re overpriced or undervalued. As you are going to trade option contracts, the best result will be expensive options.
5. Examine a chart of the underlying stock for the past year to make a decision where the stock presently is in relation to its overall price cycle.
6. Choose an option strike price which is above the actual market price to trade against the shares you will obtain and then calculate the maximum potential profit. This will be the credit you get from selling the short call options, plus the difference between the current market price of the stock at the time you enter the trade and the strike price of the call options.
7. Decide which trade to place, recalling this:
Almost unlimited Risk if the underlying stock price fall
Limited Reward being the most prospective revenue you have calculated
Breakeven, being the level to which the underlying stock can drop before you start to lose money. This will be the premium from the short call deducted from the current price of the stock when you enter the trade.
8. Build a risk graph of the most promising looking alternative. Note the almost limitless risk underneath the breakeven.
9. Make a remark of the trade setup and causes of it in your trading journal before you execute it. This’ll help lessen the possibility of mistakes, in addition to provide a admonition of how you were pondering right at that moment.
10. Want an exit plan before you enter the trade. Step in the plan involves being prepared to sell the stock at the strike price of the alternatives you will sell, if the calls are assigned.
You may conceive to exit at 50 percent maximum potential profit if the underlying stock rises – or opt to wait until a great profit is realized. If the stock falls but remains above the break-even you have estimated, there is still some profit so you will have to know beforehand what your overall objectives are and whether or not to stay in.
If the underlying stock falls under the breakeven, you may decide to keep the stock and let the call options expire worthless. The credit you have received will become a partial hedge against the losses on the stock. Reckoning on how great the fall is, you could then sell more call options for the the following month out and this may bring you back to an overall breakeven. If your objective is not cashflow but lasting investment then you could be happy to wait until the stock rebounds while you get dividend income.
Whatever your primary objective in doing this is, you ought to have a plan before you enter the trade and set your exit rules in accordance with it.
11. Execute the trade with your broker. Do it as a “limit order” so as to lower the overall cost of the trade.
12. Watch the underlying market closely from here on. Be ready to make a choice whether to trade the stock once it reaches the breakeven point, or adjust the position back to a delta neutral one to increase profit potential.
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nice post. thanks.