Covered Calls for Fun & Income

About Me

jeff-at-airport1It is not my intent to educate my blog readers on Covered Calls, alternately referred to as Buy/Writes. Believe me, just Google Covered Calls and you will find plenty of information on the definition of this trade methodology. What I want to do in this blog is discuss my journey and how it got me to this point, my education and my historical results using this methodology to create income for myself and my family. Hopefully you will be encourage by this reduced risk trading and be as successful as I have been.

So, how did it all start?

I have been an active trader now for over 10 years. My original interest was spurred by the beginning of the dot com bubble in 1997 and the growth of on-line trading. At first I dabbled in stocks of internet companies, and quite frankly made a lot of money. I mean, you couldn’t go wrong back in those days. I was young then (well, right now 49 sounds pretty young) and I could put more money at risk.

I retired early (1999) and went on the road as an IT consultant and also did pretty well from an income perspective. I was able to slip in a few trades during the day, but I did most of my research and trade selections at night. I have always been what is called a swing trader (trade the peaks and valleys) and never a buy and hold investor – I just don’t have the patience.

Around 2003 I started to research options. I did a bunch of paper trades and then jumped into live trades later that year – just buying Calls and Puts. My favorites were Apple, RIMM, Google, etc. For the most part I was successful, but I was also very nervous if I could not monitor these trades during the day. I was trading slightly OTM options with 4-8 month expirations.

At the start of 2006 I was laid off. While I was actively looking for work, I also had a lot of time to spend looking at other trading strategies. I signed up for a Forex trading course that cost a lot of money and tried that for a while. Talk about high pressure! While I didn’t lose much, I couldn’t stand to see trades go from +$400 to -$400 in seconds. I tried other option strategies – Iron Condors, Calendar Spreads, Butterflies, etc., but the one strategy that I consistently made money on was Covered Calls.

During the first few months of 2007 I was considering starting up my own Covered Call service, so I did some research looking at the potential competition. I signed up for a few services, but quickly canceled them during the trial period. Then I found John Brasher’s Call Writer web site. I signed up for his service and soon found out that I could not compete with the sophistication of his ‘real time’ Covered Call and Naked Put tables and research tools. So, I will shamelessly promote this service in my posts. If you should decide to subscribe to his service, use this link to get special introductory pricing.

If you have done any research on Covered Calls, you will see many articles that imply this is a bad trading strategy. The main reason in their argument is the limit on gains for stocks that are on a bull run. While this may be true for a buy-and-hold investor, it does not ring true for a trader looking to hedge risk while maintaining steady gains. You can tell the source of these opinions originate from web sites of traditional thinking investment firms. I don’t mean to degrade or slam that methodology; it’s just not my style.

The way that I trade this strategy is to 1) not be married to the underlying (with some rare exceptions) and be willing to be exercised on, adjusting or closing the position when necessary and 2) never write a covered call longer than the current month or the next month.

So here are my reasons:

1) Consistent Income. My personal experience is an average of 1-5% a month. I love seeing the cash deposited in my account when my trade is executed. Sometimes, over the course of 2-3 weeks, enough cash is credited to my account to allow me to take on another position – never more than 10% of my account.

2) Reduced Stress. I don’t have to be in front of the market all day, nor do I have to worry about margin because the short calls are ‘covered’.

3) Excitement. Expiration week is my favorite time, and Thursday and Friday of that week are like a party to me.

4) Qualified Plans. This means an IRA or Roth. My account is an IRA and I don’t have to report anything to Uncle Sam, and I don’t have to worry about Wash Sales.

5) Low Startup. If you have $10,000 (the minimum in my view), you can open an account and start writing Covered Calls. Anything less than that and you would not be able to be diversified.

6) Simple. If you have a grasp of what an option is, the concept of a Covered Call is simple, unlike other option strategies. It’s also easy to figure out what happens at expiration if you are ITM, ATM or OTM.

In future posts to this blog, I plan to cover the Call Writer service, how I use it to generate income, cover some good and some bad trades, my actual performance, how and why you would adjust trades (closing, expiration or rolling), what actually happens at expiration and documenting trades and earnings.

– Jeff

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22 Comments »

  1. Jeff,

    How did you get the ‘justcoveredcalls’ button added to your blog? I’d like to add it to mine as well. It is an awesome group.

    Thanks…
    Troy

    Comment by mounddweller — March 27, 2009 @ 6:32 PM

  2. Hi Jeff –

    I appreciate your blog and just walked through the youtube on the TM calculator. I have considered investing in CC’s for two years and, due to my current financial condition, I pulled the plug just this last month. I really appreciate the CallWriter website and hope to be able to afford the subscription one day. Keep up the good work!!

    Dennis

    Comment by Dennis — April 28, 2009 @ 2:37 PM

    • Dennis,

      Thank you for the comment. It’s probably pretty obvious that I am obsessed with Covered Calls, isn’t it?

      I hope your comment means that you are now doing Covered Calls. If you are and you are working with a decent balance then you should seriously consider the CallWriter service. But, regardless of what you decide, thanks for following my muses and trades and I hope they help. Don’t forget to check out the Just Covered Calls Yahoo group too.

      Jeff

      Comment by Jeff — April 28, 2009 @ 3:45 PM

  3. What my comment meant was that I am now desparate ~ I know, not a good place to be. My financial situation has forced me into a do or die. I took some money off credit lines and am implementing the strategies described in Call Writer and others to enhance my cash flow…. I know kinda crazy but hey, necessity is the mother of invention.

    Comment by Dennis — April 29, 2009 @ 5:14 PM

    • Dennis – that sounds pretty risky. I sure hope for the best for you. Good luck and keep me posted. – Jeff

      Comment by Jeff — April 30, 2009 @ 6:37 AM

  4. Hello Jeff,

    What a nice blog this is! Also I’d like to thank you for the YouTube tutorials-a great help, especially for newbies like me. Hope you can create some more. 🙂

    Keep up the good work. And good luck trading!

    Kind Regards
    Giannis

    Comment by Giannis — May 17, 2009 @ 12:21 AM

    • Giannis,

      Thanks for the comment. This blog is a labor of love. I hope I never tire of it.

      I have more videos planned but the only time to do them is when the market is open – many times I am busy then. The good thing is they are fun and easy to do. Do you have any special requests?

      Jeff

      Comment by Jeff — May 17, 2009 @ 4:44 AM

      • Dear Jeff,

        I hope you never tire of it too because it is such an inspiring place with useful information!

        Actually, I have some questions that I hope you are willing to clear up for a newbie like me.

        For instance: For some strange reason, the IB demo does not work the same way for me as in the “IB Option Trader for Covered Calls” video (e.g. when I place a buy-write option order, the Bid and Ask Price never show up).

        Is this the right section to ask these questions? Let me know please.

        Many thanks in advance!

        Regards
        Giannis

        Comment by Giannis — May 17, 2009 @ 11:42 AM

      • The only time I have seen this happen to me is when the market is closed. You may get stock prices, but option prices only during normal market hours – which are needed to calcualate the bid/ask. If the market is open, click on the Configure icon on OptionTrader and make sure “Settings – AutoLoading – Assume Underlying is a Smart Stock” is checked.

        Let me know if that helps.

        Jeff

        Comment by Jeff — May 17, 2009 @ 2:14 PM

  5. Jeff, Thanks for the emails and I love your tutorials. I have a MAC so I have to go to UTube to watch your videos. I have been writing CC for a couple of years and you have given me inspiration. I can now see where I can still make some good money each month by going deep in the money. I had pulled away when the market collapsed but now I am back in the game. Thanks again for all the tips.

    Comment by Ollie — May 27, 2009 @ 12:41 PM

  6. Jeff, Just a general comment that your posts are really thorough and useful. I’ve been reading you for some time now and appreciate the care you put into it. I especially like the explanations of each step you take and what your thinking is for doing each step. Keep up the great work. best regards, Jerry

    Comment by Jerry — June 13, 2009 @ 10:09 AM

    • Thanks Jerry. Not only is this blog an unexpected pleasure for me, it has also helped me become a more focused and disciplined Covered Call trader. It’s a win-win!

      Jeff

      Comment by Jeff — June 15, 2009 @ 6:53 AM

  7. Jeff,

    Great blog, lots of helpful information.

    One question: what is the charting service you use? I can’t quite distinguish the name from the UTube charts or from your descriptions.

    Thanks.

    Comment by Saul Seinberg — July 31, 2009 @ 5:42 PM

  8. Jeff,

    Really great to see your blog. I adopted the covered call strategy starting in 2009. You are right, the fun time is when the exercise date occurs (looking forward to next Saturday)because I get to reload or create new positions. So far I’ve achieve around 30% + YTD performance on my entire portfolio. Several of my friends have also adopted the CC strategy for many of the reasons you have listed. When a call write is created it is a pure economic decision and no attachment to the underlying stock. Happiness is a stock called away with an assignmnet. Certainly a revision of life long concept of stock ownerhship. Best of luck, Ron

    Comment by Ron J Houston — August 16, 2009 @ 6:20 PM

    • Ron,

      That’s great! You are doing very well. I hope today is not hitting you too hard – so far OK for my positions.

      – Jeff

      Comment by Jeff — August 17, 2009 @ 10:24 AM

  9. Jeff,

    Downside market offers unusual opportunity for call writers. Was able to close several positions for a few bucks. Most of my covered positions are now deep in the money after the big market move up so a lot of downside protection. I generally write calls out 6 months and target a 15% actual return. Have done some shorter positions but they don’t offer the downside protection I desire. Still working on overall strategy but for now have 85% of calls written 6 months out and wrote strike near stock price. Remainder are around 2-3 months and also keep a few shares not covered. Good luck. Ron

    Comment by Ron J Houston — August 17, 2009 @ 8:02 PM

    • Ron,

      You strategy works for you and all is right with the world. Although I would not think of talking anyone into changing what they are doing, you will have to check out my new addition to my income strategy when I launch it in a week or so. I am waiting for expiration this month so that I can have some real numbers to put out there. A short-term, low risk, high probability strategy for any market – bull or bear. Stay tuned…

      Nice bounce today, huh?
      – Jeff

      Comment by Jeff — August 18, 2009 @ 1:01 PM

  10. Jeff
    I started reading your blog. A very nice job. I have been trading covered calls and debit spreads for a couple of years, using a system I learned. Started off well – got creamed in the melt down due to holding onto underlyings I should have exited.
    But I learned something already from you – legging in on the underlying at the bottom of the channel. Pretty obvious when you think of it, but I haven’t been doing it. Thanks for that!
    I have downloaded your trading plan, and will digest its ideas.
    I also am going to try CallWriter, and will probably buy the book. I’ve bought all the other books!!

    Bill

    Comment by Bill Fletcher — August 24, 2009 @ 10:25 PM

    • Bill,

      Welcome and thanks for the compliment. Any words of wisdom that you can offer are appreciated.

      If you are signing up for CallWriter, you might want to catch the video of their Next Generation Lists – you will find the link in the Video Demonstration box on the right.

      Jeff

      Comment by Jeff — August 25, 2009 @ 5:57 AM

  11. Jeff

    I signed up for CallWriter. Even though I have been using a competitive system, there are some things here that fit my mindset better. For a start, the other system has the policy of picking and holding strong stockss, and if they go down, then hold on to them and sell more calls against them. Worked great until 2007!! Remember strong stocks like Citicorp and Lehman Brothers? I don’t like skydiving, and I don’t like stocks that do it either! So I’ll use the thinking and management discipline in CallWriter, and supplement it with diagonal spreads using LEAPS to give me a bit more bang for the buck.

    Meanwhile, some nice souls have been adopting some of the dogs that have been sitting in my portfolio on life support! (Excuse my mixed metaphores!)

    Bill

    Comment by Bill — August 26, 2009 @ 12:32 PM

    • Bill,

      I don’t like sky diving either, even with a parachute. I like your strategy – and why not, it’s similar to mine! Keep commenting, I like to know how you are doing.

      – Jeff

      Comment by Jeff — August 27, 2009 @ 7:40 AM


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