• Options Course
  • High Level Options
  • Privacy Policy
  • Terms of Use
  • Cookies
  • Financial Disclosure
How to Trade Options ยป ways to write covered calls

Write Covered 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:

Write Covered Calls

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.

Write Covered Calls

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.

Test Drive MarketClub and use their SmartScan for Covered Calls – only $8.95

Filed Under: COVERED CALLS Tagged With: calls, how to write covered calls, ways to write covered calls, when, write covered call options

Search for Anything Here

Main Pages

  • Home
  • Options Basics
  • Covered Calls Options
  • Advanced Strategies
  • Option Spread Trading
  • Stock Option Trading
  • Index Options
  • Stock Chart Analysis
  • Forex Options Trading
  • Options Trading Software
  • Option Trading Systems
  • Commodity Futures Options
  • Options Broker Reviews
  • Glossary of Options Trading Terms
  • Financial Disclosure

Latest Articles

  • Investing Basics – Diversify Your Portfolio to Make Money
  • Want Trading Success? Avoid These Four Trading Mistakes
  • Technical Analysis of Stock Charts
  • The Calendar Straddle Option Strategy
  • Candlestick Chart Patterns Explained
  • Bottom Fishing Stocks Using Inflated Option Prices
  • Bottom Fishing Stock Strategy – Example
  • Comparing the Bear Call Calendar Spread with the Traditional Bear Call Spread
  • Is Binary Options a Scam if you Have a System?
  • Call Calendar Spread Example
  • Options Trading Education and Training
  • The Call Calendar Spread Explained
  • The Three Legged Box Options Trade
  • Near Riskless Trading Strategies
  • Is Binary Options a Scam? Read This and Decide
  • Gold ETF Investing – 10 Facts You Should Know
  • How to Profit Like a Pro Trader
  • Earnings Report Definition
  • Jamie McIntyre and the 21st Century Academy
  • You Can! Be a Successful Options Trader


options trading pro system

Save

Home   |   Site Map   |   Privacy Policy   |   Terms of Use   |   Amazon Affiliate   
Copyright © 2002- Option Trading Fortune. ALL RIGHTS RESERVED.

Page copy protected against web site content infringement by Copyscape


DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.