Get Rich - Stay Rich - Investing for Monthly Income

Writing Covered Calls With High Quality Stocks Using Volatility

This is a great strategy because it uses the highest quality stocks that high a high volatility.  I define a high quality stock as a stock rated 5 stars by the S&P rating agency.  As we know, when volatility is high you get more premium from selling calls against your stock.  This will increase your return on investment for covered writes.

Here is how it works:

  • stock volatility is higher than the market volatility measured by the S&P 500 index (SPY);
  • stock has high implied volatility to generate good call writing return on investment;
  • Stock pays an annual dividend whose yield is at least 3% or better.

Then, if not called out, you can rewrite the call month after month until you are called away.  This strategy will minimize the amount of time used in selecting stocks and managing trades.  This will also lower the stress involved with covered call trading.

To implement this strategy, you should look for:

  • A low to medium historical volatility between 20-40% but higher implied volatility which tends to generate more premiums;
  • A historical volatility of 30-60% with similar implied volatility as you will hold these stocks for several months – the high HV will provide more premium each month.
  • Lastly, do not try this strategy on a lower quality stock just to increase your returns – stay with the 5 star stocks.

The use of high quality stocks will lessen the number of potential stocks because you have preselected a stock list.  The high quality stocks are generally blue-chip stocks that pay a dividend.  I am not a fan of buy and hold investing but this strategy is an effective way to maximize monthly income from investments.

The high quality stocks or blue-chips tends to move less in price compared to smaller cap stocks.  These high quality stocks tend to outperform during periods of uncertainty in the markets.  This is why we use these stocks in this strategy as they can weather the market downturns and rise during a bull market.  this a nice strategy to include in your monthly income plan.

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