Many traders view cover calls as a simple single strategy, but they can be utilized in multiple ways in numerous market conditions, writes Alan Ellman.
Most investors view covered call writing as a singular strategy where we buy a stock and then sell an option leveraging that security. Educated option-sellers realize that one of the most remarkable advantages of using this strategy is that it can be crafted to achieve multiple goals and meet the trading style and personal risk-tolerance of a wide range of investors.
Given my medical background, this reality made me think of steroids, an anti-inflammatory that has so many uses. This miracle drug can be utilized to treat arthritis, bone diseases, gout, muscle diseases, blood diseases and so much more. To think of steroids as simply a drug that decreases inflammation is not doing it justice. In this same regard, this article will summarize some of the ways covered call writing can be designed to meet the needs and goals of a wide range of investors.
Covered Call Writing: The Steroid for Investors
The many uses of covered call writing summarized below. (hot links provided for products and more information)
Traditional covered call writing: We buy a stock and sell an option using stock selection, option selection and position management as the three-required skills needed to get started. Our portfolios turn over frequently.
- Portfolio overwriting: Covered call writing our buy-and-hold portfolios using only out-of-the-money strikes with lower initial time-value return goal ranges.
- Collar strategy: Covered call writing with protective puts. Bernie Madoff called this the split strike conversion strategy… let’s not go there.
- The Poor Man’s Covered Call (PMCC): Covered call writing using deep in-the-money long-term (LEAPS) options as stock surrogates.
- Covered call writing with ETFs: A more conservative approach to covered call writing using less volatile securities requiring less capital investment to achieve appropriate diversification.
- Covered call writing to create a FREE portfolio of large-cap tech companies: Covered call writing blue-chip (Dow 30) stocks to purchase shares of Invesco QQQ Trust.
- Covered call writing to convert non-dividend stocks to dividend-like securities: Using four trades per year to convert stocks that offer no dividends to simulate stocks that offer quarterly dividends.
- Stock repair strategy: Sell call options against both shares and long calls to reduce the breakeven price point when stock prices are in losing positions.
Discussion
Covered call writing, much like steroids to patients, can be tailored to meet the needs of investors in a myriad of situations. Limiting its application is not doing justice to the potential this strategy offers to those of us seeking to become CEO of our own money and ultimately to achieve financial independence.
Use the multiple tab of the Ellman Calculator to calculate initial option returns, upside potential (for out-of-the-money strikes) and downside protection (for in-the-money strikes). All the different covered call strategies listed above are explained in full on the Blue Collar Investor Website.
