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What Makes a Good Covered Call?
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Background

Covered Call investing is the most conservative of the five option investing techniques, which are: buy calls, sell calls (uncovered/naked), sell calls (covered), buy puts, and sell puts.

Covered Call investing isn't much different than simply buying and selling stocks, which most people are already doing and are already familiar with. The difference is that, when you sell your stock which you already own, you agree to sell your stock at a certain agreed upon price known as the Strike Price. The right for someone else to hold this agreement, to buy your shares of stock at a certain price, is what's known as an "Option". This Option generates an "Option Price" or Option Premium, which is the key and the strength of Covered Call investing.

The Option buyer pays the Covered Call writer a Premium for the right, not the obligation, to buy the shares or Exercise the Option on or before the expiration date (the third Friday of each month).

The Magic of the Premium

The Premium the Covered Call writer collects is what makes Covered Call investing very profitable over time. For instance, if you can write Covered Calls monthly and generate an average 10% monthly profit from the combination of the premium plus any additional profit you receive from being called out, you'll make a 120% yearly return on your investment (213% compounded)! This is much higher than any mutual fund returns. Mathematically, a $3,000 initial investment can balloon to $1,000,000 in just over 5 years if you average 10% monthly returns and don't add any more to your original $3,000 principal investment (other than reinvesting the 10% monthly profits).

But how do you find the stock that you can buy that currently has premiums of 10% or more to write Covered Calls on that stock? What makes a good Covered Call?

We'll answer the second question first. A good Covered Call is most often a call with a high premium (a premium that is 10% of the value of the stock or better when not on margin and not "In-the-Money"). High premiums are usually generated by positive volatility in the stock. If there is some sort of positive news or other excitement about the company the stock usually will go up, sending the premium up. Since you are usually only looking to hold onto the underlying stock for a short period of time you can use the premium percent as a guide to look for good Covered Call candidates.

You must still do your own detailed research of the fundamentals of the underlying stock to see if it's a security you'd be comfortable holding if valuation of the stock or premium dropped.

Let's Be Realistic and Informed

Why are there call options with such high premiums? We will quote from the expert to answer this question:

"More volatile underlying stocks have higher option prices. This relationship is logical, because if a stock has the ability to move a relatively large distance upward, buyers of the calls are willing to pay higher prices for the calls--and sellers demand them as well."

McMillan in "Options As A Strategic Investment"

So again, we can't stress enough:

You must still do your own detailed research of the fundamentals of the underlying stock to see if it's a security you'd be comfortable holding if valuation of the stock or premium dropped.

By having your research pool include stocks that produce high call premiums you have another angle to find stocks that can possibly help you make monthly and yearly returns that are relatively conservative (compared to option buying) yet potentially more profitable than simply buying and holding stock.

Where to Find High Call Premiums

Right here at www.CoveredCalls.com! This is what we specialize in. Under our DATA section we post pages with the "Best Calls (Premium %-wise) for the next 30 Days, 60 Days, 90 Days". (Remember, the premium we are talking about is the option price). These are calls, sorted by premium percent, with premium percentages that traded at 10% the value of the stock or higher that day. These premium percent values are not on margin and not "In-the-Money". We don't want to mask the percentages for you. (If you do choose to write on margin then your premium percentages can double!) Best of all, this is FREE information posted for our visitors!

Good luck writing Covered Calls!


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