We learn from failures, not from success
I seem to be all over the map when it comes to a strategy for Cover Calls. I really do not have one to speak of and it has shown in my performance. I hope in this post I can begin formulating a strategy to use for this week’s trades.
For me, there are 2 reasons to use cover calls:
  1. I need to sell specific stocks to make a required portfolio adjustment, or
  2. I want to milk out a little premium income on the stocks I am holding for the long-term
For Required Portfolio Adjustments

I do portfolio adjustments to realign my assets as personally require. Typically, I would just sell a stock, make whatever asset changes needed and then purchase a replacement that is trending up. However, as long as my need is not a fire-sell situation, I should have the patience to collect a little premium along the way.

For this scenario, selling a near ATM Cover Call that expires by week’s end seems reasonable.

For a perspective – if I sell 100 shares of a stock today and it goes up by week’s end then I’m a moron and wish I would have waited a week to sell. Likewise, if the stock price drops by week’s end then I’m a trader-savant. Regardless, I have to sell the stock and I do not know what the future holds. So it does not matter what day I sell, I’ll have the same visceral reactions one way or the other.

Selling a cover call option on a necessary stock sell to expire by week’s end is nothing more than scheduling a limit-sell order GTC. For a limit-sell order, I would set a price ceiling and set how long I want to wait until the price reaches that price (GTC). With a 5-day cover call option, I’m doing the same thing but collecting a little premium as I wait.


For Premium Income From Stocks I’m Holding Long Term

Defining a strategy here is not so straight forward. Here are some of the strategies I’ve considered:
  • One-week (1-5 days), deep OTM (> 90% probability OTM).
  • One-month (24-29 days), deep OTM (> 90% probability OTM).
The cons of a 1-week strategy are:
  • The improbable 90% OTM can be quickly overwhelmed by 1 or 2 good stock days.
  • The strike price for a 1-week, DOTM trade may only be 1-3% above the current price. This is well within the percentage range that any stock can rise in a day or two.
  • Time decay has already eaten up most of the potential premiums. So I am only collecting dimes on the dollar.
The pros of a 1-week strategy can be:
  • If it expires worthless your risk is over quickly (dodged that bullet).
  • I can resell the same cover-call option next week. So if I’m lucky, within 1 month I can resell the same option 4 times – collecting 4 times the paltry-premiums.

The cons with a 1-month strategy are:

  • I will tie up my stock for the duration of the option.
  • If my stock shoots up well beyond my strike price, then I lost that run-up for a puny premium.
The pros of a 1-month strategy can be:
  • To expire ITM, it will have to have many consistently good days.

For a perspective – if I bought a new stock today and held it for a year and it had a 12% market value growth, I would be happy. 12% growth is not stellar on the aggressive-growth scale, but it is better than the average 1-year portfolio growth.

Therefore, if I bought that same new stock today and sold it after 30 days for a 12% return, should I not be ecstatic? If I don’t get premium greedy, any stock I have that makes 12%+ in 1 month should be a win.

Suggested Cover-Call Strategies:
For necessary stock sells:
  1. Sell a 1-5 days near ATM (prob. OTM < 60%) cover call for the required stock.
    • If it expires worthless then resubmit next week, collect more premiums.
    • If it sky-rockets and then gets assigned then suck-it-up, I was selling it anyways plus I made a little extra with the premium collected.
    • In the last hour, if it appears it will close ITM but below the break-even price, then buy back the option contract as a profit then resell the same option next Monday. (Break-even prices will be discussed in a future post.)
  2. Make sure the premium collected is greater than the assignment fees. I want to make money – not lose it.
  3. DO NOT consider 5-day DOTM options for stocks I want to keep. They will be assigned more often than I think.
For stocks I want to hold:
  • Sell a 24-29 day DOTM (prob. OTM > 90%) cover call. Make sure the strike price is a percent growth that I would be happy with if it sold (suggesting 10%-ish).
    • If it expires worthless then I can resell the option again.
    • If it sky-rockets then it should have not gone too much beyond my strike price because I already calculated the skyrocket effect (+/- 10%) into the strike price I selected. I’ll call this sky-rocket factor “Head Room”.
    • If it gets assigned, immediately submit a limit-buy order for my original strike price (less all fees). When the market pulls back for profit-taking, then I can repurchase it at a break-even price.
Picking a Stock for a Cover Call

Not all stocks make good Cover Call Options candidates. If I want to generate some income from Cover Calls I need to design my portfolio with good candidates. Some stocks are fairly low volume and do not have any Options. Many will have Monthlys and a smaller set will have both Monthlys and Weeklys.

Additionally, Options with higher volatility will have more premiums, and those with more premium means I can go further out of the money to find a worthwhile trade. So when I rebalance my portfolio, I need to keep an eye out for those stocks that also make good Cover Call candidates.

Finally, the market value of your stocks that you package for a Cover Call will also affect what is an acceptable risk.

Take AMD for an example;

  • My assignment fee at Ameritrade is about $20. So ANY premium I collect must be more than $20 or I could lose money.
  • Today, AMD sells for $29.92. So with a 10% Head Room, a starting strike price should be $33.
  • Looking at a 29-day expiration, 1 contract at $33 strike price has a premium of $108 (Yeah!).
  • However, the probability of OTM for this 29-day option at $33 strike is only 72% (Boo!) – which is well below my DOTM requirement of > 90%.
  • Scanning down the options table a strike price with a prob.OTM > 90% is $37.5. This strike’s premium is $33 (obviously much less than the $108 sited above).
Technically, this is a good Cover Call construction. It is highly improbable that it will go ITM (90% probability of expiring worthless in 29 days).
If it does go ITM it did so by increasing in price nearly 25% in market value within the 29 days (Yahoo!), and I received $33-fees for my trouble. If I think $33 is to puny, then I could sell 2 contracts ($66) or 3 contracts ($99) or more.
If I sold 1 cover call contract for AMD per month for a premium of $33, that is an extra $396 per year you collected by doing nothing. If AMD market value for 100 shares is $2,992, then that extra $396 in premium collected represents an additional 13% return on the investment. Not bad…
P&L and Performance Status
Net profit = $1,549.94, Spread’s ROC = 27.3%
Last Month (May):
Net profit = -$524.11, ROC = -17% (includes -$42.42 for Margin Interests)
  • Started 11 trades (6 Put Spreads and 5 Cover Calls).
  • 11 trades have completed, 0 still cooking.
  • Of the 11 completed trades, winners = 8 (+$417.00), losers = 3 (-$898.69)
MTD: Net profit = $870.80, Spread’s ROC = 14.5%
  • Started 15 trades (9 are cover calls and 6 are spreads).
  • 7 trades have completed, 8 still cooking.
    Of the 7 completed trades, winners = 6 (+$328.30), loser = 1 (-$.40)
Trades Ended 6/21/19:
UNH $250cc – Expired 6/21 – ITM – Net Premium Collected $184.55

ETF:XLV $86.5p/85.5p – Expired 6/21 – Worthless – Net Premium Collected = $27.05

CSCO $56.5cc – Expired 6/21 – ITM – Net Premium Collected = $38.55

MSFT $138cc – Expired 6/21 – Worthless – Net Premium Collected = $26.05

Trades Still Cooking

ETF:DIA $251p/$246p – Expires 7/5 – Net Premium Collected = $99.05
Probability of OTM when traded was 79.7%. Now is 94.1%.

ETF:DIA $251p/$246p – Expires 7/12 – Net Premium Collected = $55.05
Probability of OTM when traded was 87.6%. Now is 90.4%.

ETF:QQQ $176p/$171p – Expires 7/12 – Net Premium Collected = $73.05
Probability of OTM when traded was 84.6%. Now is 83.8%.

New Trades for This Week

ETF:QQQ $176p/$166p – Open 6/25 – Expires 7/19 – Net Premium Collected = $65.05
Probability of OTM when traded was 84.5%.

Even though QQQ’s recent bounce up from the downward trend, it currently shows very little legs. However, the 9-Day SMA is still above the 50-Day, so I’m going with it.

This trade has the same short-strike as the QQQ trade I made last week. But because I saw the premium drop from what is essentially the identical spread, I took that as a good sign.

Note: There’s a fairly complex set of formula that is used to set the premium prices on options – including lots of Greeks, underlining fundamentals and the neurotic reactions by current traders. One outcome of all these machinations is that premiums tend to fall where the trading-herd is less likely to go. I’ll add to my decision matrix – falling premium prices is a good thing for crafting my Bull Put Spreads.

AMD $36cc – Open 6/26 – Expires 7/19 – Net Premium Collected = $48.55
Probability of OTM when traded was 93.5%. Head Room = 20.5%


I want to hang on to AMD for several reasons. One of which is that it has been a good cover call option candidate. The stock has been consistently trending upward. I can see it bounce around in the tend channel for the past 6+ months.

The strike price I selected is at the very top of the trend channel at expiration. If AMD continues doing what it has been doing then I should be golden…

CRM $150cc – Open 6/27 – Expires 6/28 – Net Premium Collected = $193.10
Probability of OTM when traded was 57.8%. HeadRoom <1%

For the past 3 months, CRM has been in a downward trend. The market analysts have downgraded the stock to a “Reduce/Sell”. With so many other stocks moving up, I’m going to dump this and buy something better.

I bought 200 shares at $143 back in Oct ’18. Today (6/27) the current price is $149.58, so I should make @$1,400 over the past 8 months. Plus, today I sold 2 contracts at a strike price of $150, expiring tomorrow, at a net premium of $193. Doing the math… this represents an 8.4% annualized return on this one investment.

ETF:SPY $280p/$270p – Open 6/28 – Expires 7/26 – Net Premium Collected = $76.05
Probability of OTM when traded was 80.2%.


One might consider the non-stupid cover calls to be a near no-lose trade. If we can define a yearly percentage growth expectations for our options (“all I can get” don’t count) and only chase after those 1-month cover calls that exceed that yearly growth expectation, then there should not be any cover calls that we would consider a failure.