CallWriter's family of Covered Call Real Time Lists™ presents literally thousands of covered call trades, served up on different lists for your convenience and to save you time in trade selection. The covered call is a very simple trade, both in concept and in execution. To create a covered call, we simply write (sell) call options (calls) on stock that we already own or bought for that purpose. The classic covered call trade is the buy-write, in which we buy shares and write call options against them. The covered call position looks like this:

If the call option is in the money (ITM) at the call's expiration - meaning that the stock's price is higher than the call's strike price - it will be exercised, and you will be required to sell the shares underlying the calls. If the stock price at expiration is the same or less than the call strike, exercise will not occur, since it is cheaper for the call's holder to simply buy the stock in the open market.

Don't forget Rule #1: be willing to own the stock. You can get away with breaking this rule in a hot market, but you never know when a goofy stock's day of reckoning will come.

The Covered Call Illustrated

OK, let's build a covered call trade with Nucor Steel (NUE):

Compare this to a similar trade in a Superput.

If Nucor remains at $29 through expiration, our return is $2.00, or 7.4%. But if the stock is over $30 at expiration, we will be assigned - called out of the stock - and our total return will be $3.00, over 11%,

If the stock falls, we are protected down to the $27 cost basis. In this example I would make a note of where support is for the stock. I'm more concerned about the stock breaking below support than below breakeven.

If the stock pulls back, I buy back the call if I can repurchase it for 50% or more of the premium I got upon selling it. Stocks tend to pull back occasionally, especially when the market has a few bad days. View this as an opportunity to close the call, which temporarily raises your cost basis, and sell it again when the stock snaps back with the market.

Choose the list

The return is not the most important thing. I am looking for good trade setups - see the Approaching the Lists help page. See also my Quick Tips. If you have not read those pages, please go now and read themt, since this page will not repeat the pointers they make.

For covered calls, I always start with the Global Select (Dividends) lists. They short-cut some of my research, since I don't worry about their quality. Based on my outlook, I choose the list. The trade-off for quality of company is a generally lower return. And if a Global Select stock high on the list has a return equivalent to other lists, take a careful look, because news may be coming.

Bullish, I look at the Global Select OTM. Then I look at the uncategorized OTM lists and the ITM-OTM lists for pharmas and high-volatility stocks. On the latter lists, simply sort by the Return Called column, to put the OTM plays, with their much higher returns, on top.

More neutral, I try the plain-vanilla Global Select list. Then the S&P, then the Nasdaq 100 lists. I like big companies. If pharma-related stocks are doing well, I go there.

Feeling conservative, I look at  the Global Select ITM plays. Then I look at the uncategorized ITM lists and the ITM-OTM lists for pharmas and high-volatility stocks. On the latter lists, simply sort by the Return Called column, to put the lower returns at the top of the list.

If I am downright bearish, I don't look for covered call, naked put or SuperPut trades.

John's Two-Fer Trick

This is what Lisa Brasher named this particular little trick. If a stock is on both the current- and next-month lists, it is a reasonable indication that some kind of event is pending that could really move the stock. In other words, the expectation of future volatility in the stock is causing premium to be very overpriced, because traders are really buying the calls (or puts).

I normally try to avoid stocks where implied volatility is too high in relation to the stock's historical volatility. This indicates that news is coming; frequently it is earnings, but it can durned nigh impossible to find the news. And I am too lazy to look. So I tend to avoid these situations, not wanting to get bushwhacked.

But if the volatility event causing premium to swell is in the NEXT month, then it is reasonably safe to write calls in this month. You should still be willing to own the stock, however. Don't employ this trick on a goofy stock!

Still, check for earnings - they must be in the next month, not the month you write. And preferably, several days into the next month after current-month expiration. Also check a 60-miniute chart. If the stock is negative on that chart avoid it, because it is a declining asset.

This little trick, which as far as I know I was the first to publcize, will make you money.