Picking stock for Covered Calls

A comment on my last post asked how I picked the stocks I write covered calls on. Here is a short outline:

  1. I use the option scanner available from Trade King to get a list of stocks in the price range I want to trade and with the volatility I am looking for. For example I will scan for stocks trading from $10 to $15 with volatility from 40 to 80.
  2. I then start reviewing the stocks using Yahoo Finance and Motley Fool CAPS to weed out some that look good too me. I am looking for profitable companies with recent good financial news and good stock price trends. I try to diversify industries with the few stocks I am able to write covered calls on so they are not all affected by the same news. This usually narrows me down to 5 or 6 prospective stocks.
  3. I then use a covered call calculator to find the possible returns on the stocks I have found. I look at options expiring for the next two months and would like to make 3% to 5% per month if called. 2% to 3% on the option premium if uncalled. This will usually get me 2 good prospects for covered call writes.
  4. I then try to place trades and get filled at the prices that make sense to me. These stock sometimes have quite low option volume, so getting an order filled may not be possible at a price I like.

I try to be flexible with this process to not pass on stocks that may be a good investment. I also keep an eye out for stocks that may be good future covered call prospects, so when my current positions expire I have some new prospects to study.


11 Responses to “Picking stock for Covered Calls”

  1. wealthseminar Says:

    if your stocks gap down, what would you do ?, if you cut lost, at what price ? and when ?

  2. Tim Says:

    I have taken some pretty serious losses waiting for a stock to recover. I keep an eye on the option pricing. If there is no chance to wait to expiration and sell another call at the same strike, I will sell out of the position.

  3. Online Options Trading Says:

    do you know how to choose a good biotech stock to do covered call ?

  4. Tim Says:

    I currently do not have any biotech stocks on my watch list. I tend to like companies that are currently profitable.

  5. Charles Says:

    I’m not sure its a good idea to do covered calls on biotech stocks. CC’s limit your upside but not the downside. I have never successfully done this, but had the opportunity if I had the clarity I now have in hindsight, but the best thing to do for biotech’s that have pending FDA approvals is to setup a straddle (or even a strangle). I found POZN had spectacular implied volatility around the time it was to get approval for its one drug. All the rumors indicated it would get approval, so I went long on OTM calls. If I had put in place a straddle, I would have made a killing to the downside and probably would have done very well if the approval had gone through. As it was, I lost $1000. Lesson learned.

    For CC’s stay away from stocks with too much volatility (unless, I suppose, you want to use a collar and manage the short call aggressively up/out when possible). I am starting to like the idea of deep ITM buy/writes for downside protection and have found I can roll them up/out for a smallish-cost and maintain lots of downside protection.

  6. Robert Says:

    How does one adjust a straddle/strangle when it has gone bad.
    Do you put stops on so that when it hits these stops you obviously get out and write another one at a more favourable price?

  7. Fred Thompson Says:

    This is a great article. A well disciplined covered call trading strategy can be very profitable and will beat stocks in all BUT the strongest bull markets.

    Also, any covered call trader will need some sort of tool to help him make decisions on when to manipulate his positions. A great tool can be is located at http://www.coveredcallcalculator.net

  8. Tania Clifton Says:

    Super awesome article. Honest..

  9. Paul Phillip Says:

    I think the most important reason to pick a stock for a covered call #1 is for easy lower % profit income but more importantly is to pick stocks you PERSONALLY know. Stocks you’ve watched for years – you know their every move. You are a Jedi in other words. Until you get to that stage you are likely to continue loses because you should have a good feel for when your stock moves (up/down and how far up/down). I hope this point got drilled into some of you. Cheers.

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