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The Importance of Doing Covered Calls Correctly

By Edited Dec 19, 2015 0 0

If you are going to be doing covered calls you will definitely need a screener for covered calls. There are so many things you can do to make sure that your experience with covered calls goes perfectly. Not a lot of people realize just how fun it can be to do covered calls the right way. There are so many different ways to do them and they are one of the safest investment strategies out there. If you are doing these calls in this specific way then there will be definitely a lot of money that you can make off of them. You do not want to waste time doing these things the wrong way because then you will not be satisfied with your results. They are safe and they will definitely pay off if you go about them the right way. The important thing is that you know everything you are doing.

Investing in covered calls though is time consuming. With over 200,000 combinations of strike price, expiration, and underlying stocks, the task is daunting. Using a covered call screener to help narrow the field will save you time. But then what? How do you maintain your existing positions? When to roll and to what strike or expiration? That’s where having a modern covered call calculator comes into play - it will import current prices and compares the option you have already shorted with several alternatives, showing you the advantages and disadvantages of rolling. A good calculator will know the difference between the option bid and ask, rather than just use the last trade. Because when you need to buy back your short option the only guaranteed price you can expect is the asking price. Likewise, the only sure amount that you will receive for the new option you sell is the bid price. Using any other prices is a longshot. But if your calculator understands bid and ask prices then you will receive the prices you expect when you place your orders.

Using a calculator for covered calls will save you a ton of time and increase the accuracy of your return calculations. For starters, the calculator will know current market prices (perhaps 15-minute delayed, but still that's much better than end of day closing prices). Then throw in the knowledge between bid and ask prices, so that it calculates trades that you can actually execute in the real world. Lastly, it should know about ex-dividend dates and earnings release dates, and warn you if either occurs before the option expiration date. There is an open question about calculating covered call returns, though: Should you use the stock basis or the current net debit (stock price minus the option premium)? Most investors who buy stock specifically for the purpose of writing calls against it will choose the net debit method. And investors who own stock for the long haul and write out of the money covered calls will choose the stock basis method. It's really about personal preference; there is no right or wrong way. A good calculator will let you choose which method to use.

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