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