Lesson 3: What makes a good covered call?
What makes a good covered call? There are some criteria that should be met when picking a covered call:
- High premium
- Moderate to high volume in both stock and option
- Neutral to good indication for the stock for next weeks
At CoveredCalls.de we can help you a good way along the road: you'll find lists sorted by premium for most US stocks. Further, we have links attached to each stock, so you can easily check the chart and volume at Yahoo!.
If you are pretty bullish on your stock, sell a call which is "out of the money" (OTM). This means, that the strike for which you'll have to sell the stock is above the current quote of the stock. This way you have potential for some extra profits.
If you're not so convinced in an upward move of the stock but rather expect some sideway action for the next weeks, it might be better to sell a call which is "in the money" (ITM): the strike is below the current quote. This means you'll loose some money by selling the stock, but the premium is higher than that of an OTM call, which compensates the loss. The advantage of an ITM call is a better downside protection. So the probability of closing this deal with a profit is higher than with an OTM call, altough the profit potential is smaller.
If you have further questions feel free to write us at questions@coveredcalls.de.
