8 Stocks for a $25,000 Diversified Covered Calls Watch List
I cover what I’m trading and how I’m looking at stocks and options. I can’t predict markets, stock prices or interest rates. Nobody can. All we can do is trade and manage risks.
By Donald E. L. Johnson
Independent Speculator
Selling covered calls on owned stocks generates premium income.
Focus on a few stocks with liquid and relatively deep options that make filling orders easier.
Buying stocks, ETFs for writing covered calls should be done on bullish stocks in bullish markets.
Eight stocks, small trades, diversify risks.
Spreadsheet calculator and trade tracker shows possible trades.
With the markets in or near corrections and looking pretty bearish, this probably is not the time to buy stocks and write (sell) covered calls to generate a steady stream of income. But some “buy the dip” speculators do that every day.
A call option that is covered by an owned stock generates premium income for the seller of the call. At the same time, the call option buyer can buy the stock at the contracted strike price only when the option expires at a price above the strike price. Each option is for 100 shares.
For example, if a trader buys 100 shares of Ford (F) for $21.65 and sells one F 2.18.22 (28-day trade), expiration $22 strike call for $1.16, the immediate return on risk (RoR) would be about 5.36%, or 69.84% annualized. The potential gain would be 1.62%. The 1.85% dividend wouldn’t be collected while the trade was on. The delta at the moment is .42. That means the probability of the stock closing on Feb. 18 above the $22 strike price is about 42%. A lot of brokerage firms’ trading platforms can be set up to show deltas and other Greeks, most of which I ignore.
The trader hopes to do the same kind of 28-day trade 13 times a year to get the “annualized return”. It’s impossible to do exactly the same F trade 13 times in a row because stock and options prices fluctuate.
Every trader has a different financial situation and trading time horizon, which can be a few days or a few decades in the future. Everyone’s tolerance for risk and greed for profits is different. We have to trade so we can sleep at night.
Selling covered calls and cash secured puts (CSP) are good trading strategies for new and less experienced traders. But they also are great strategies for experienced traders who know that these strategies can generate annual premium income streams of 10% to 20%. Returns on Risks (RoR) depend in the risks assumed and, of course luck.
It makes sense to trade calls and puts on the same stocks over a few months or years. This gives traders time to become very familiar with a company, its fundamentals and how it moves in the markets under varying market conditions. Trading AEO, F, KMI and other stocks and their options repeatedly also saves research and trading time. When an option expires, just roll it forward in a new trade, depending on market conditions and changes in the fundamentals and valuation.
Here are seven stocks and and exchange traded fund (ETF) that I own. I sell covered calls on them weekly, monthly and sometimes between 2 and 45 days, depending. Again, this article is meant to be educational, not trading advice.
Please click on the image and zoom in for a better view.
These are all relatively good looking but not guaranteed or even predicted long-term investments for speculators who trade both established and newly public companies like 23 and Me (ME) and SOFI Technologies (SOFI). ME and SOFI have been around for years, they’re unprofitable and they have disappointed a lot of speculators since they went public last year. Yet, they are expected by some analysts and speculators to be great investments long term. Others are avoiding these kinds of speculative stocks in today’s markets. You can read about them on SeekingAlpha.com.
The sample trades shown in the spreadsheet will need to be adjusted to current market conditions when traders decide to do them. The hard part is deciding that the stocks are more likely to go up than to sink. When the markets move, about 70% or so of individual stocks and ETFs move with the markets. Immediate premiums don’t offer much of a hedge or cushion if a stock drops. An annualized premium of 10% to 20% might offer some comfort, but premiums change with changes in an equity’s volatility, so none of these cushions or hedges are perfect.
There are a lot of price and market forecasts being offered by portfolio managers, stock analysts, economists and market letter writers. It’s all noise. They don’t know. They tell you what they think.
The market gurus to pay attention to are the folks who tell you what they are trading. But even these people are talking their books. And for various reasons, they often recommend stocks that are over bought because those are the stocks that viewers and readers are most interested in. I seldom agree with or do “Final Trades”.
I’ll do some of that, too, but I try to find really good trades. Some will work. Some won’t. I can’t do every trade idea I write up.
The key is risk management. Cautious traders limit their risks and take reasonable returns. Getting hits and singles works better for me than swinging for the fences.
(Recommended reading: Noise, by Daniel Kahneman et al. It shows how given the same information and data, actuaries, judges, physicians and other experts come up with widely and wildly different risk assessments, prison sentences, diagnoses and forecasts. That’s why I look to charts and other technical indicators, not “experts” to give me a feel for where the price of an equity, the stock markets and interest rates are going. Markets are instant polls of smart people–speculators and investors—who have money at risk. Click baiting is not their game.)
Having said that, the spreadsheet shows some pretty impressive immediate and annualized RoR. If a trader stays in these equities for a long time and trades options on them weekly or monthly, the RoR will shrink as the underlying prices fluctuate.
When a stock is down 10%, it is harder to find good covered calls trades unless the trader is willing to risk having a stock called at a loss. And when a stock is soaring as SOFI has over the last few days, it often is better to let it run its course before selling covered calls on it and risking having it called before you are ready to sell.
These trades are designed to generate some good immediate and annualized RoR as well as some pretty nice short term capital gains. It always is a trader’s job to decide whether a trade is worth doing.
My spreadsheet is used to evaluate potential trades and to track trades and results. It’s an easy way to count your money. I also use OptionsPlay.com to find and evaluate both speculative and income trades. And I use the charts on my broker’s platform and at stockcharts.com to evaluate technicals. StockRover.com is used to evaluate fundamentals. See yesterday’s article on evaluating these stocks and selling puts on them.
LINKS:
Eight Stocks for a $25,000 Diversified Puts Portfoio
SOFI Surges: Buy? Sell Covered Calls? Sell Cash Secured Puts?
Stock Futures Flat; Time to Sell Short Duration Puts?
CNBC.com
Coveredwriter.blogspot.com
OptionsPlay.com
SeekingAlpha.com
StockCharts.com
StockRover.com
Yield Busting Corner , https://join.slack.com/t/yieldbustingcorner/shared_invite/zt-11zpzo9au-r~L1jh8Jpte0XVgv5i0ibg
Beware. I'm an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. I reserve the right to trade any of the listed stocks at any time. I own and/or have options on the stocks mentioned in this article.