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Posts Tagged ‘stock appreciation with covered calls’

Writing Out-Of-The-Money Covered Calls

If you are bullish on a specific stock, then you should consider writing an out-of-the-money (OTC) covered call.  This type of call includes a strike price that is above the current stock price.  You still get a call premium but is generally less than an at-the-money call.  But you also get the potential of stock appreciation because of the higher strike price of the call sold.  This creates a situation for potentially two income streams from one trade.

This trading strategy works best when you can confirm the stock being in an uptrend or if the stock is bouncing off a support level.  A support level would be something like a 50-day moving average or even a Bollinger Band that has been stretched on the bottom.

The key to this strategy is to be right about the stock price moving higher in the near future.  Due to the OTM call offering less premium than an ATM and having a low delta, they can be slow to lose value on a stock pullback.  This strategy should be used in special situations or during a slow moving bull market.

Also, you want to avoid this strategy when he stock has gapped up until the new price range is confirmed.  Stocks that gap up usually pull back before they stabliize in a new trading range.  However, a stock slowing moving up is a good opportunity for OTM writes.

This strategy works well when you have a down-day in the stock or market.  The stock price decline will usually be temporary down and will bounce back in a few trading days.  You need to be sure the market decline is not a permanent correction that will be sustained for months.

This is a good strategy for stocks you do not want called away in a flat market.  You can still get an increased profit if the stock price is above the entry price at expiration.  Then, you get an even bigger return if you get called out at the higher call strike price.

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