I've just set up my trading account, and I'd like to start by selling covered calls. What criteria do you use to evaluate a stock's suitability for this strategy? I'm thinking BAC. My goal is to make 1%/week. Thanks.
1% a week? I'd say that's a pretty optimistic goal (to be kind). Covered calls work well in slow uptrends (or even in slower downtrends) and range-bound markets, but they hamstring you on big moves up and don't do a whole lot to protect you against downside moves. Options premiums are high right now due to the volatility over the last year, and if you look at BAC, there haven't been too many months where it hasn't moved less than 15-20%. To buffer moves like that, you'd need to sell deeper in the money calls (which reduces your potential profit). The way I like to play covered calls is to slowly build a position on a dividend paying stock while selling slightly in the money calls 1-3 months out. Every time the options expire, I sell new options (purchasing additional shares to average down if needed). Some people will crucify me for saying "averaging down," but the dividend + monthly option premium constantly builds up my padding (and my position is built slowly so that unless the stock goes bankrupt, I'm ok). Like anything else, there are risks, but they are acceptable to me. My goal is somewhere along the lines of 1-2% a month (average)
I sell covered call options on ETFs. DIA, SPY, IWM, QQQQ. I make about 2% per month. I can possibly make more but I would like to leave free cash for adjustments. I would like to find out volatility rankings for ETFs. Any source? Thanks
Sorry but it's impossible unless you assume a load of risk in which case you'll just lose your money quicker. Sorry to be the bearer of bad news but chances are you're read a book (or gone on a course) that says selling covered calls is an easy way to make easy money. It's not, never was and never will be.
You can easily make 1% a week by writing covered calls on BAC. Sometimes, even more. The premiums are fat and the stock is fairly low priced so the yield is good. All you need for that to occur is for 1) implied volatility levels to stay high (or go higher), 2) for the stock to always be near the call strike written at every expiration and 3) believing in Santa Claus. FWIW, only #3 is realistic
Good replies. Let me add that instead of BAC, you may want to be more diversified and try the financial etf: XLF. I got burned last year on C when I swore that $7 was the bottom. However the deep covered calls I wrote did help, I wasn't glad that I made the investments. Think hard about the downside, it's not play money.
It is not possible to consistently make 1% or even close on covered calls. What do you do if the stock tanks? All you are doing is getting a little downside protection.