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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Michael C. Thomsett, author
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  • Increasing Covered Call Income By Writing Short-Term Contracts 0 comments
    Sep 13, 2013 3:26 PM

    When you write covered calls, did you know that you can produce greater profits by writing six two-month covered calls per year, than you will realize writing one 12-month covered call per year? It's true - time decay for further-out options is quite small, so writing options more than few months away is equal to lost time. Based solely on option premium profits, focusing on short-term ATM or OTM contracts produces annualized double-digit returns.

    An example of the covered call and how to identify profit, loss and breakeven points: You purchased 100 shares of stock two months ago and paid $54 per share. Today those shares are worth $58 and you decide to sell a covered call with a strike of 60 and expiration in two months. You receive a premium of 3 ($300).

    In this example, you have several crucial price points. Your basis in stock was $54, but because you received 3 for selling the call, you net basis is reduced to $51 per share. This is your breakeven point and if the stock price moves below this level, you will have a loss. With a strike of 60, your potential profits are called as well. If the underlying stock moves above 60 and the call is exercised, your profits are limited to:

    Capital gain on stock:

    Exercise price, 100 shares $6,000

    Less: Purchase price - 5,400

    Capital gain $600

    Profit on the covered call 300

    Maximum profit if exercised $900

    If the call is not exercised, you keep the $300 as profit. And when the call expires or when you close it, you are then free to create another covered call with a later expiration date.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. You can take part in discussions among members on the site at the Members Forum.

    I also offer a twice-monthly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. Join at Newsletter - I look forward to having you as a subscriber.

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