Covered Calls Can Boost Profits

I began my journey in the world of floor-traded options at their inception in 1975. That opportunity was catalyzed thanks to the advent of the modern world of options trading.

What was that catalyst back then was a call options trading pilot program as that daily trading was launched on the CBOE in 1973.

What immediately struck me as a viable options strategy was how selling covered calls (covered by owning the underlying stock) nicely added to the overall returns on a long stock position. I would quickly and efficiently build a rewarding (for clients and myself) Covered Call/Writing business. Today, some 43 years later I remain committed to the validity of that original concept as time and price have proven the strategy to be quite profitable.

Of course no strategy is risk-free. However, if I had to choose "one," that choice for me is the: Buy-Write strategy.

The Buy-Write, or Covered Call approach is basic and relatively simple. It is a learned approach, but that learning curve is short in time. What it is not is: a "get rich quick" program.

The Buy-Write approach is a disciplined, long term strategy for those more inclined to invest instead of trade.

Yet, a trade of an option (the selling of the call which is covered by long shares of stock) is required in order to form the overall Buy-Write position.

The flow chart of any Buy-Write begins and ends with the stock. As such, both the fundamental and technical conditions of the (underlying) stock are studied when choosing any Buy-Write candidate.

My "Covered Call Candidates" (C3) is a list of stocks and ETFs that have been filtered through what I know to be important technical measures for any stock that might be a candidate for being a "Buy-Write" stock.

A Buy-Write candidate that makes the C3 list is one that is peaking as per its volatility cycle. In addition, the stock (or ETF) in question is one that should be moving into an extended uptrend over the life of the call that will be sold (covered).

The candidate is determined to be a stock (or ETF) that is projected to be at its volatility zenith. If so the premium "captured" by the sale of the call should create an ample and immediate credit to the account (and position).

And the candidate stock or ETF is then fundamentally analyzed in all aspects that I deem necessary.

Over the proverbial long run the average return on any Buy-Write should exceed 10% (not annualized!), if not a higher percentage. That total return is predicated on the necessity of the underlying (stock or ETF) eventually being sold as the covered call expires in tandem with that stock or ETF sale.

At times the covered call in question becomes an exercise of the long stock/ETF. That of course is a "good thing" as any calling away of a long stock/ETF position implies that the Buy-Write was a nicely rewarding and successful set up. May all of your Buy-Writes end with you being: "called away"!

My C3 list requires the underlying stock or ETF being near or already in an uptrend. The programming that scrubs the list of Covered Call Candidates (C3) is built to eliminate as much risk to the buyer of the stock or ETF as possible.

It is best to think of any Buy-Write set up as one which begins and ends with the both the fundamental and technical prospects for the underlying stock or ETF as first and foremost being a bullish one. In other words, to Buy-Write or not to do so is secondary in the flow chart of the decision making.

And, thus, it is the ensuing sale of the covered call that creates the Buy-Write position. The selling of the covered call is an effect, and is not the cause for the decision to employ the Buy-Write tactic.

Know too that ANY Buy-Write position is 100% equal to that of the short sale of the put (that is the reciprocal of the call sold covered). That includes any dividends to be paid to the stockholder over the life of the call sold covered. Simply stated, there is no free lunch in options too.

Know too, beforehand, that a Buy-Write while being somewhat of a hedged position due to the premium received from shorting the covered call, is not by any means a 100% hedge. The hedge created by the short sale of the call does reduce and "protect" the downside risk for the long stock or ETF, but ONLY to the extent of the premium gathered (taken in) from the sale of the covered call. And that position remains a liability of sorts for anyone who executes the Buy-Write until that sold call expires.

The Buy-Write strategy can be one that over an extended period of time creates an ample return basis that of the risk taken. However, the Buy-Write strategy does not work well in elongated bear market cycles. That fact is the ultimate caveat for when not to attempt in size the Buy-Write Strategy.

My latest C3 list is below. Dividends are a very important factor relative to the long term return of a Covered Call strategy. Thus, that data is always presented.

Each week, beginning tomorrow, and on future Wednesdays when a Buy-Write trade opportunity sets up, I will post a Buy-Write trade article. The stock/ETF chosen will become the Covered Call Candidate of that week.

Please do not hesitate to ask questions and comments should they arise.

At the time of publication, Raschke had no positions in any securities discussed.