4 Ways to Implement Covered Call Writing

Covered call writing is a low-risk option-selling strategy that can be structured in a myriad of different applications. Personal risk-tolerance, income goals, cash available and trading style all play roles in how we craft our trades. In this article, 4 covered call strategies will be defined and calculated to demonstrate the flexibility investors enjoy as it relates to covered calls:

• Traditional covered call writing
• The Collar strategy
• Portfolio overwriting
• The Poor Man’s Covered Call (PMCC)

All trades use NVDIA Corp. (Nasdaq: NVDA) as the underlying stock.

Traditional Covered Call Writing

The goal is to generate cashflow with elite-performing stocks or ETFs that need not be retained if exercise occurs. The initial 33-day return, and upside potential is shown, using the BCI Trade Management Calculator (TMC) in the green ovals:

Portfolio Overwriting

The goal is to generate modest cash flow while share retention is critical. Annualized return goals can range from 4% to 15%. Initial return and upside potential are shown, using the TMC, in the green ovals:

The Collar Strategy

The goal is to generate cash flow and buy a protective put to prevent catastrophic losses from share price decline. Returns are lower due to the put price debit. Initial results and combined calculations with upside potential are shown in the red ovals using the *BCI Collar Calculator*:

Poor Man’s Covered Call PMCC)

Instead of purchasing shares of stock, long-term options called LEAPS are purchased instead and short-term covered calls are written against this long position. It costs less to enter a PMCC trade. Initial returns are generally higher than traditional covered call writing because of the lower cost to enter, but all pros & cons must be mastered before deciding to implement this and the other strategies. Initial return and upside are shown in the purple oval using the BCI PMCC Calculator:

Discussion

Covered call writing is a multifunctional strategy that can be deployed in a myriad of ways. Strategy goals, personal risk-tolerance, trading style and cash available are factors that will dictate which approach is best for each investor.