Covered Calls Can Work Wonders

There is almost nothing more frustrating for an investor than to see an investment trade sideways. Granted, it is better than the stock moving lower, but it can still be disappointing. As an investor with no knowledge of options, you have two options: hold or sell. Take a look at the example of Boeing Co. (BA) below. Essentially, the stock has traded pretty much sideways since the beginning of 2023.

Not Much Income

As the owner of the stock, there is not much you can do to make money if the stock trades sideways. But well-informed option traders know that is not the case.

As a knowledgeable option trader or investor, using a covered call when the stock is trading sideways may make perfect sense. A covered call is owning stock and selling a call option that is usually out-of-the-money (OTM). Generally, an investor will sell a call for every 100 shares.

Implementing the Covered Call

The $215 level has acted as a very nice resistance and if an investor used a covered call strategy by selling a 215 call, it pretty much would have expired worthless or could have been bought back for much less than it was sold almost every time. Think about that extra income!

At the time of this writing, a 215 call with just over 3 days to go until expiration can be sold for 2.46 (or $246 in real terms) as seen below. If BA closes at or below $215 by expiration, the option expires worthless as it would have done numerous times so far in 2023. The option could also be bought back before expiration below or above the $215 level. Even if the option is bought back for more than it was sold, the stock gain would still produce an overall profit for the position depending on the initial purchase price.

Duplicate the Success

If you had done that every week or two, think of the extra premium you would have accumulated even if $246 was not realized each time you sold a 215 call. At the time of this writing, it is the beginning of April so that would have been 3 months of rather consistent potential income on a stock that bounced around a lot over that time.

Not every covered call will work this efficiently, but when a neutral to slightly bearish forecast is out there, selling some premium to increase profits may not be so bad. This option can be a pretty big game changer.

John Kmiecik, Market Taker Mentoring

Trader Education