Implied volatility (IV) is the level of stock price volatility implied by an option’s price, expressed as a percentage. For example, 35% is normal rather than high, but 85% is rather high. An abnormally high option price suggests - but does not actually forecast - imminent higher volatility in the stock’s price. There are three main reasons why premium and therefore IV get high:

Covered call writers love high-premium plays, but we have to pay attention to the fact that premium is high for a reason. Since IV just might be high because of impending news, and that news could be very important, it pays to look for news. Searching out the news is not an absolute requirement for covered call success, but the smaller, less established and less profitable the company is, the more important it is to track down the source of high IV.

Stick with established, profitable companies that are growing earnings – always the best bet for covered calls.

A CallWriter member recently stated that covered call writing takes too much time and can interfere with running a business. Actually, covered writing can involve huge amounts of time, or very little time. It all depends on your objectives and your approach.

The two areas that involve time and effort in covered writing are research and monitoring trades. Research in order to find the best stocks with high call returns can take time, since the research is our best protection against stock failure. We monitor trades partly in self-defense but also partly to look for opportunities to close the trade advantageously or simply to trade the calls. Trading the calls (buying them back cheaper than they were sold and then selling them again as the stock moves back up) can really add to returns, but it is not necessary in order to succeed at call writing. Many covered writers let their trades go to expiration regularly, closing them early only every now and then. And there is nothing wrong with this laid-back trading style.

Milking every possible penny out of trades requires watching them and trading the calls as opportunity presents itself. This obviously takes more time than simply writing calls and checking open trades once a day or so. But active monitoring is not a requirement when you write only the best companies.

For those unable or unwilling to monitor trades frequently during the day seeking transient trading opportunities, there is an easy way to write covered calls that involves fairly little time. Simply stick with S&P 100 stocks that are profitable and growing profits. The preferred method is to sort through the stocks on CallWriter’s S&P 100 list to find a group of candidates you like that frequently have high premium and therefore are frequently on our lists (ideally in different industries) and concentrate in them. Or you might like stocks such as Dell that have already taken a hit and formed a new trend or trading range. Doing this cuts down significantly on research time, and the same thing can be done with our Nasdaq 100 list. Note: avoid the ones in trouble or whose chart shows the stock diving for the cellar!

Write ATM for maximum return, or write ITM for less return but a larger premium and thus more downside protection (not every ITM call will offer good return). It’s your choice.

Then simply let the trades go to expiration and, if not called out, either re-write the stocks following expiration or sell the stocks and find new trades from the same list and write them. This writing style works just fine, and the majority of covered call writers probably trade in this fashion - conservatively and laid back.

I get this question occasionally, and this is a good time to address the topic. The US stock and option markets open at 9:30 am Eastern Time. Stocks begin trading immediately, but stock options don’t. There is a rotation in which options begin trading and perhaps 15 minutes after the open, all stock options are trading.

However, it is almost never a good idea to buy or sell stocks during the market’s first 30 minutes, known as buying or selling the open. The reason is that stocks rising at the open often fall; stocks falling on the open tend to stabilize and maybe rise. The first 30 minutes is sucker time, almost always. Traders frequently get panicked on the open and want to sell a dropping stock as high as possible, or buy a rising one quickly lest a hot opportunity get away. And occasionally this will be true.

But more often than not, you’ll wish you had waited if you trade the open, whether the stock is up or down. Some consider the first 20 minutes the open, but I am more comfortable with 30.

Since all equity options don’t begin trading immediately (those further from the money open first), it is pretty much a necessity in option trades to avoid opening or closing them in the first 30 minutes. Don’t worry about missing something: call premium is a function primarily of intrinsic value, if any, delta and implied volatility. The first 30 minutes of trading will not have much effect on option premiums except for those deeply ITM, and running covered calls in the first 30 minutes usually means you will either be cheated on premium or overpay for the stock - or both.

In recent posts I discussed, among other things, plays involving Allegheny Technologies (ATI), which just pulled back below its 50-day moving average yesterday (May 1) and recovered slightly today after opening right at the 50-MA. This pullback to support is a common thing for ATI in its uptrend, it’s just a matter of getting the timing right. Thus the coming pullback and bounce off support was a no-brainer, given the strength of 1) ATI itself, 2) its uptrend, 3) the metals industry and 4) the overall market. This was a duhhh play. We didn’t need news or to play earnings to cream a very strongly performing stock making a very obvious move.

Here’s a daily chart (click to enlarge) - I didn’t mark it but imagine the 50-MA close to the $108 level:

As ATI fell, covered writers were well advised to buy back short calls, since closing calls at a lower price than they were sold creates a profit. Or roll the calls down repeatedly. But as yesterday’s price dip illustrates, you have to be watching to catch some of these moves. Another good play I discussed was to buy the 105C when it bottomed, although I would expect the next wave in the uptrend to take it well above $120, so there is still room. Sure, implied volatility was high, making it expensive, but it was an excellent, high-quality play. If you bought the 115P or 120P as also discussed, you should have closed it out yesterday for a very nice hit.

I thought ATI would spend more time testing the 50-MA, and it still may come back to do just that, but sometimes great opportunities like this are transient.

BTW, this stock came off of our staid, boring old S&P100 list!