Tuesday, April 19th, 2016

Selling Covered call & writing strategy


Selling covered calls is a popular option trading strategy used by institutions to generate consistent monthly income. Many professional traders hedge stocks by writing covered calls thereby reducing the risk of outright ownership of stocks. Covered call writing is best suited in neutral and bullish markets. If this market stays slightly bullish we can benefit from such a trade. From what  believe, Warren Buffet is known to use covered calls on billions of dollars he owns stocks, perhaps making a nice income.

Therefore we will use a deep-in-the money selling covered call strategy to generate monthly income.

CHESAPEAKE ENERGY -SELLING COVERED CALLS STRATEGY

This is a strategy we used in January 2009, lets go back and look at a trade that made us good income, when the world was falling apart, mood was pessimistic and Obama wasn’t the President and calls of depression were ringing everywhere.

Chesapeake Energy Corporation, an oil and natural gas exploration and production company, engages in the acquisition, exploration, and development of properties for the production of crude oil and natural gas from underground reservoirs.

IF  CHK stock stays above 15.00 by January we may have a nice trade. Due to the increased volatility when the stock was slammed hard we found some good premiums to sell. We sold some DEEP-IN-THE-MONEY calls, using a very conservative strategy favored by Hedge Funds, Mutual Funds and professional traders.

BUY 1000 shares CHK at current market = $16.64 

Sell 10 January $15 Calls  =  3.50

Net Debit (Break-even point )  =  13.14

Max profit potential  =  16.64-15= $1.64

Premiums taken $3.50 -$1.64  =  $ 1.86

We will exit  and close the trade if CHK trades at $13.24 10 cents above our break-even, using  a stop loss placed at the time of buy-write. IF CHK stays above 15 we keep the premium and our net profit is  $1.86 x10 = $1860 on or at January 20 expiration. Stock was removed from our account at $15.00 and the amount credited resulting in a net profit of $1.86 or $1860

Using this  deep-in-the-money covered calls strategy, we can benefit if the market stays bullish or neutral for few days in coming weeks. The trade has risks to the downside should the stock drops below break even points creating losses.

Comments

4 Responses to “Selling Covered call & writing strategy”
  1. For the non-professional trader it must be difficult to develop their own strategy. I think it must be a good idea to get lots of education before investing real money. Doing paper trading is good practice too, don't you think?

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