Best Covered Calls

You've read the Covered Call Tutorial. You understand how covered calls work. Now you want to do one. Great! But which one to do?

The Best Covered Call Stock

First and foremost you need to do your own research and pick a company that you like enough to want to hold their stock.

There are many factors in choosing a stock to write covered calls against but many conservative investors find that large market cap, blue-chip, dividend-paying stocks are a good place to look. They don't pay the highest premiums but they are usually less volatile, which conservative investors like.

The Best Option To Write

After you've chosen a stock, your choice on which option to write depends on several variables, most important of which is where do you think the stock price will be when the option expires. What is "best" for you may not be "best" for someone else if you each have a different outlook for the underlying stock, or different risk tolerance, or risk/reward criteria, or even different basis in the stock or tax situation.

Choosing an expiration month: If you are buying stocks for the purpose of writing short-term calls against them, then you probably want to stay away from options that have earnings releases before the option expires. In Born To Sell's pages you can uncheck Earnings Before Expiration to remove them.

The other consideration is to realize that an option's value decays quicker in the final 30 days of its life (as the seller, this is to your advantage), so you may want to write a series of short-term (one month) options instead of a single longer-term option, in order to maximize your time premium capture.

Choosing a strike price: If you think the stock will decline, you should be looking at ITM options. If you think the stock will stay about where it is by the time the option expires, then ATM would be a good choice. And if you think the stock will go up then an OTM option will allow you to capture some of that stock appreciation in addition to the option premium you receive. See Moneyness page for discussion of ITM/ATM/OTM.

If you are using covered calls for income, are not targeting capital appreciation from the stocks going up, and would like the most downside protection possible (i.e. conservative investment style) then ITM options are the way to go (they would be the best covered calls for those parameters). Stay on the left side of the Moneyness slider; at least 10% ITM, and maybe even 15% or 20% ITM.

Previous | Next