calls

How to Write Covered Calls – An Aggressive Strategy

When we write covered calls one way of doing it is to sell out-of-the-money (OTM) call options over-purchased stocks or futures. The normal manner in which this is done is to own a specific number of shares equivalent to the number of option contracts you will sell. For example, since one option contract in the USA cover 100 shares, you might purchase 1,000 shares and sell 10 call option contracts at exercise prices above the share price on the date of purchase.

The premium you receive when you write covered calls OTM is designed to offset any capital losses should the share price fall after purchase. In such cases, you can buy them back cheaply, then sell more calls at a lower exercise price, bringing in more premium. But you’ll also have less capital gain on the shares should the price recover.

To illustrate, let’s take a look at Cisco Systems shares (CSCO). As at the date of writing, Cisco shares closed at $17.60. We look at a chart and notice an “inverted head and shoulder” pattern, which signals a possible impending price reversal.

So we buy 1,000 shares at $17.60 and sell 10 call option contracts at $19 exercise price and 39 days to expiration. Leaving out future adjustments, our risk graph would look something like this:

Our maximum profit at expiration is $1,630

But You Can Also Write Covered Calls This Way

Now let’s consider a more aggressive way to write covered calls, but this time with much more profit potential without sacrificing risk.

Here’s what we do:

1. Purchase 1,000 CSCO shares at $17.60
2. Purchase 10 x $18 Call Option contracts with 39 days to expiration, for $0.54 per contract
2. Sell 20 $19 Call Option contracts with same expiration period, for $0.23 each = $0.46 total.

You’ll notice that the premium received from selling twice the amount of calls than we bought, gives us an almost zero cost for the options positions. Ideally, placing this part of the trade for even money would be a better alternative, but this should do to illustrate the point for our purpose here. Look out for higher implied volatility in the OTM options if possible, for even money trades.

Now let’s take a look at the revised risk graph.

When we write covered calls using this more aggressive strategy, our maximum profit increases from $1,630 to $2,320. The extra 10 sold contracts are “covered” by the 10 bought contracts at a lower strike price, so there are no extra margin requirements.

Our more aggressive covered call strategy includes slightly more risk since we don’t have any premium to offset a fall in the share price. But then again, should the price fall instead of the anticipated rise, we now have twice as many already $19 “sold” options that we can now buy back for next to nothing and then sell more call options for the lower $18 strike price, thus making a profit.

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Easy Ways to AutoTrade Covered Calls

To autotrade covered calls you need an arrangement with a broker that specializes in this type of service. There are some good ones around while others are pretty average. The best ones make everything easy for you while also assuring security against misappropriation of your funds.

The idea behind auto trading covered calls can be done one of two ways. The first way involves giving a third party access to the funds in your brokerage account so that they can trade on your behalf using your money. The second way is to deposit your funds with a broker that is connected with a covered call advisory service. The broker will place trades according to recommendations provided by the service and within the parameters you specify.

One such broker, based in the USA, is. They offer autotrade services on more than a dozen reputable covered call subscriptions, including 10PercentPerMonth.com, 5 Percent Per Week, Anacott, BigTrends.com, OptionSmart and many others. You simply go to the relevant subscription page where all the services are listed together and click on the “AutoTrade” link against the service of your choice. If you don’t want to autotrade covered calls and prefer to do it yourself, you select the “subscribe” link and will receive recommendations via email or other media.

TradeKing offer some of the lowest brokerage fees for the US markets that I know of – and yet they are right ‘up there’ when it comes to the scope of trading facilities they offer. So if your trading style is to let professionals do all the research and place trades automatically for you, this broker could be an ideal choice.

AutoTrade Covered Calls – Benefits and Risks

There benefits to autotrading covered calls, the most obvious one being that you don’t have to be an a active participant in the trading process – and this means that if your provider is successful at what they do, you’re virtually looking at a passive income stream.

On the other hand, there are risks. If the provider you choose is not competent and places too many bad trades so that you lose money, you have no recourse for reclaiming lost funds because they will be protecting themselves with a disclaimer that leaves the risk entirely in your hands.