When getting started in covered call trading you have so many options available that it can be overwhelming to determine where to begin. Before you place any trades, you have have an ideal of what your perspective should be. This is where you want to keep it simple so you don’t get stuck in option overload. Here are some suggestions:
- Keep it simple. Don’t sell uncovered options because they represent free money because the stock can’t move that far. This can cause some humongous loses beyond your magnitude of capital.
- Always keep it safe. You should know your risk tolerance and don’t venture beyond it. If it feels risky, then it is too risky for your mental risk avoidance.
- Keep it sensible. Don’t trade anything that takes you beyond your sleeping and eating points. Stay within your comfort zone.
- Keep it diversified. You gain some level of safety through buying different stocks in different industries than a large trade of a single stock.
- Keep it disciplined. Always stick to your trading plan in all cases. More often, losses occur and get larger because of a lack of discipline.
- When you implement a trade, you should have these tow items in your head:
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- Set an approximate goal – the point where you expect the strategy to produce profits.
- Set an exit point to be used if the trade goes against you.
You should keep in mind that selling calls against your stock holdings is safer than just holding stock. Here, the concept is to continue owning stock but to give yourself some downside protection and to get some income from the option premium. This approach is not as exciting as buying calls and anticipating a hugh stock rally. However, our goal is to preserve our capital so we can continue to create a monthly income.