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Best Covered Calls

As I'm sure you must realise by now, the covered callcovered call writer options  Anna writing strategy can be used in many different ways, and by many different types of trader, and naturally the returns on covered call writing will vary. I have only identified two strategies to adopt, but there are many more, which whilst not complicated, all relate in some way to the market conditions and the view of the trader as to what constitutes a good return. There are so many variable and factors at work that it is almost impossible to provide any hard and fast guidelines, but I will try to give some guidance as to what you may expect using this covered strategy and to try to write the best covered calls as a result.

Covered Call Income

You may have come across the expression - a zero sum game - In essence this is what options are and in theory if all options were perfectly valued then your return would also be zero over time. Fortunately they are not! Now if we consider the wider markets and how they are likely to affect your returns, the following general statements will apply :

  1. In strong bull markets, the returns on covered writing will generally be lower than on long stock holding.
  2. In neutral or mildly bearish markets, the returns on covered writing will generally be better than on long stock holding

To some extent the above statements are common sense. Since the covered call strategy is an equity based one we must try to compare returns with a simple buy and hold strategy. In essence we are looking for stocks where the movement is sideways and neutral. If the broader market is doing the same then we will be making better returns than the buy and hold strategy of the investor, since the underlying stocks will not be increasing in value significantly. On the other hand if the markets are rising fast, then the covered call returns will be lower, since we are capping future profits so the returns on the buy and hold strategy will be better. In summary, therefore, we need to consider the broader markets by looking at the major indices to see where the markets are going - ideally we would like flat neutral markets for the best covered call returns.

Now your returns on covered call writing will clearly depend on how you implement your strategy, and in particular your choice of stock, strike price, expiry etc. but remember above all else, call writing is a short term strategy, not a long term one - why? - because you want time working for you, not against you. Let's look at some examples and see the type of returns which are achievable using the closest following month call options and nearest OTM strike price. These figures assume the contract is exercised.

Stock : TIBCO - Tibco Software - Market Price : $7.39
Call Premium Strike Profit Option Profit Stock Total Profit % Return
2.25 5.00        
0.20 7.50 20.00 11.00 31.00 4.2%
0.05 10.00        
0.00 12.50        
Stock : ACF Americredit - Market Price : $17.40
Call Premium Strike Profit Option Profit Stock Total Profit % Return
5.00 12.50        
2.65 15.00        
0.75 17.50 75.00 10.00 85.00 4.88%
0.05 20.00        
Stock :  MCD - McDonalds - Market Price : $54.47
Call Premium Strike Profit Option Profit Stock Total Profit % Return
4.60 50.00        
2.45 52.50        
0.90 55.00 90.00 53.00 143.00 2.6%
0.15 57.50        

In my personal view, these are the sorts of returns you should be aiming for in a conservative strategy. If you try to achieve improved % figures, then undoubtedly you will be trading in higher risk options where the HV and IV will be higher. Good solid returns are what you should be looking for, not high risk returns. Remember also that the above percentage returns are based on a month only. If you repeated this over 12 months, this would equate to something like a 40-50% return - offer that to most fund and investment managers and they would bite your arm off - trust me!!!

If you use the covered call strategy conservatively, you should look at trading positions that yield between 3% and 5%. If they do then you can reckon that you are in the right area in terms of volatility and stock/option selection criteria - any more and you are taking too much risk.

OK, that's it - I hope you find the site useful, and if you have any comments pleas just drop me a line. As always, good luck with your trading, and please try covered call writing - it is a useful strategy to learn and have available and remember that the call writing returns above are only a rough guide. I am currently writing several more sites on options to look at some of the more exotic strategies, so please check back regularly to the trading and investing site Making Bread  where these will be announced in due course, in the meantime start writing covered call options and see what returns are available - kind regards, Anna