Good questions, Jennifer

Jennifer’s question from my previous post: LINK

There is the rub of writing covered calls: What if the stock price goes down. The answer is: depends. Primarily on what you think of the stock/company at that time. Is it down because of company news? Is it down because the market in general is down? Do I think it will recover?

I have gone through all of these over the last 5 months that I have been writing this blog. I have developed a couple of rules of thumb:

  • I try to buy slightly out-of-the-money (3-5%) covered call positions and make 3-5% per month on the option premium, 1 to 2 month options, net of commissions.
  • If the stock is called I make a little extra, if not called I want to be able to write a call again at the same strike price and make a decent return. I will not cry if I get to sell several contracts before the stock is called away.
  • If the stock falls to the point that there is little to no premium at your strike price for the forseeable future (4-5 months), seriously consider buying back the option and selling the stock.
  • Your opinion of the underlying stock/company plus what the overall market action has to determine whether you keep a falling stock on the belief it will recover or you sell and reinvest elsewhere.

Having said all of that, I believe I have held on to my losers to long in the past and try to make an early decision to sell.

As to the actual trading, it is not hard. You can go to the Trade King website and click through the screens to see what they show. Once you have an account open you can enter trades in the screens and see how they work. You get a preview before the trade is sent in so you can cancel if you want. You can also easily cancel pending trades.

Start small, pick out a trade you would like to make and see if you can get it filled at a price that works for you. If you have a stock in mind let me know and I will review some trade possibilities for you. Your questions give me good stuff to write about.

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One Response to “Good questions, Jennifer”

  1. Options Strategery Says:

    I usually sell naked puts and have been looking for other people’s opinion on covered calls. This is great. I have the almost exact same problem of holding losers too long and selling winners early.

    It’s a shame that you don’t post any more.


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