written by reader Covered Calls

By hd123sftail, March 8, 2012

After reading about covered calls I really am becoming interested in giving it a shot. My problem is identifying stocks to try this on. I don’t have a large account so at best I can only buy 1 or 2 options. When I look at the premiums they barely are large enough to make any money. How do I search for higher premiums till I can build up my account? Any advice is greatly appreciated.

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Travis Johnson, Stock Gumshoe
March 9, 2012 12:26 pm

This definitely works better as an income investment when volatility is high (volatility as reported by the VIX index is really just a measure of the premiums being paid by options traders, which implies what kind of volatility they expect from the underlying stock market), but there is certainly risk if you reach for the more volatile stocks that give you higher payouts — because you can easily catch a capital loss from a falling share price that more than clobbers your income from selling the call.

I dont’ do covered call selling very often myself, but folks I know among this group tend to use the strategy for stocks they know very well and follow very closely, and many prefer stocks with a solid dividend that helps to backstop the share price (and boost your income) — if you’re trying to start with a very small portfolio it can be tough to diversify enough or sell enough options because the commissions eat into what are (if you play it safer) small repeated transactions.

These more conservative options strategies (cash-backed put selling or covered call selling) are not for the impatient, in my experience, pushing for a higher return by using more volatile picks that you don’t know well or by expending your expiration dates out further can be rewarding when you get that quick payout, but it increases the risk substantially. I’m sure there are many Gumshoe readers out there who use these strategies far more actively, and many folks have reviewed their favorite options newsletters and trading services (http://stockgumshoe.com/category/options-or-futures/), hopefully others will chime in with some ideas for you.

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