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Trader Laurie Itkin talks about why covered calls are a great way to get your feet wet if you want to start trading options.
My guest today is Laurie Itkin and we’re talking about covered calls and strategies to use there, and why they’re a good opportunity for traders. Laurie, talk about covered calls. First of all, what is that strategy?
That’s the strategy that I teach most of my clients because it’s a bridge between stock investing and options trading. Many of us who do covered calls use the analogy of if you were to buy a second home as an investment you wouldn’t let it sit there hoping that it goes up in value; you would rent it out for monthly income. You can do the same thing with stocks or ETFs.
Alright, should I be using weekly options, monthly options, what do you like?
That’s the beauty. I do it all. I think for beginners, I would recommend monthly options, but there are a lot of people who, for instance, like to do covered calls on Apple (AAPL) and other instruments like that on a weekly basis.
Alright, now this question always becomes what strike price do I buy? What expiration? How far out? I mean you have all these juicy option premiums and if I sell, they look great, but there’s probably a reason why I’m getting so much money for that. What do you recommend?
Absolutely, because based on the volatility of the stock, you might see higher options premiums. There are really three basic types of strike prices: out-of-the-money calls, at-the-money calls, and in-the-money calls. The typical covered call writer usually does an out-of-the-money call, so it allows for stock appreciation, plus a moderate options premium. However, I’m somewhat pessimistic all the time and so I like to have some downside protection, and I personally do a good number of at-the-money and in-the-money calls.
Alright, if I own a thousand shares, should I be selling ten option contracts or do you go exactly or is it less? What do you like there?
It’s a matter of personal preference, but people should understand that the ratio is that you can’t do a covered call unless you have at least a hundred shares of stock. The ratio is a hundred shares of stock and one sold call option.
Alright, what about some of the lower priced shares. If I own something that’s $6, should I still be trying to do covered calls against that?
You’ll find that the lower the share price, the option premium for selling the call will also be very low. Generally, people are usually looking at share prices or ETF prices of $50 or higher, but again it’s personal preference. Of course, if you’re doing high price stock like Priceline (PCLN), Google (GOOG), or Apple (AAPL) because the stock price is so high, the call premium will also be high.
Alright, then finally what about covered calls on all of the stocks in my portfolio, is that something you recommend? Should I only do half of them? What do you like to do?
Well first of all, a lot of stocks and ETFs and don’t have options available on them so that already cuts out some of your choices. It really depends. If you think that a stock and you’re really bullish on a stock and you think it’s going to go up a lot quickly, you may not want to sell a call option on that because, of course, when you sell the call option you are agreeing to sell the stock at that stock price.
Should I sell puts against these as well to save time? How much income is getting a little too risky for that?
Well, I think a lot of people will sell puts to get into the position where they’ll sell a put at a lower price than what the stock is trading at so that they can buy the stock at a lower price. Then if the stock is put to them in order to generate monthly income, they’ll sell call options against that stock.
Alright, Laurie, find out more information about covered calls, what’s your website address?