Over the past decade shareholders saw an For long term investors in high quality companies, volatility is not risk. No thanks, I prefer not making money. Selling options to other people is how many professional traders make a good living. For traders including call writers , volatility is both risk and opportunity.
Technical analysis is probably as much art as it is science, but it's still a critical tool in the search for the best stocks for covered calls. When considering a stock to write calls on, use your favorite stock charting software (or check out the free charts at StockCharts) and consider various short, intermediate, and longer term time frames.
Pessimist thinks that the price of GOOG is going to stay the same or drop in the next month, but he wants to continue to own the stock for the long term. At the same time, Mr. Once the trade is made, Mr. There is a very simple explanation for this fact. When you own the underlying stock and write the call it is called writing a covered call.
This is considered a relative safe trading strategy. If you do not own the underlying stock, then it is called writing a naked call.
This is called the "time decay" of options in that each day that goes by the odds of a price movement become less and less. Here are the top 10 option concepts you should understand before making your first real trade:.
But it's a fine line. As a net option seller , you get paid to assume someone else's risk. For covered call writers, the risk you assume is stock ownership on someone else's behalf while they retain most, if not all, of the short term potential price appreciation.
Just be sure that you don't assume too much risk in order to reach your option income targets. It's important that the options market on any given stock you're considering as a covered call candidate be sufficiently liquid. If the options are too illiquid i. Not only will the bid-ask spread be too wide for good pricing whether you're selling a call or buying it back but if you ever need to adjust or roll a position, the limited number of strike prices and expiration months available will really constrict your choices.
Dividends don't get mentioned much when it comes to covered call writing, except in discussions about whether a call might be exercised early. But you should be aware that dividends do play a role in call option pricing. In theory, on the day a company pays a dividend , the stock should trade lower by the amount of the dividend because that money is no longer owned or controlled by the company.
Obviously, it's the supply and demand of buyers and sellers that ultimately determine the share price, but that dividend payout is still a short term headwind against the stock. The premium you receive from selling the call will be reduced roughly by the amount of the dividend for expiration months that include the dividend distribution date. The takaway is this: You can try everything we have free for two weeks.
We're confident you'll like what you see. Login Free Trial Free Newsletter. Covered calls are an easy and conservative income-oriented investment strategy.
Use our covered call screener to earn extra income from stocks and ETFs you already own, or to help find new investment opportunities selling the best covered calls. I already own stocks to write calls against. I'm looking for new buy-write opportunities. Search today's , covered calls with our easy-to-use interface.
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What a Covered Call Writer Wants
Writing covered calls on stocks that pay above-average dividends is a subset of this strategy. Let's illustrate the concept with the help of an example. Example. Consider a covered call on telecom giant Verizon Communications, Inc., . Making Kraft-Heinz stock another one of the best stocks for covered call writing. If KHC drops, the investors break-even price is reduced by the option premium and the dividend receive, which is $ Existing call option market. These stocks have call markets. Not all stocks do. Liquid markets. Only large-cap stocks with average volumes of 1 million shares traded per day were considered. Options markets tend to be more liquid for larger and more heavily traded stocks. Volatility and safe Altman Z-scores. Each stock placed in the "safe" .