How to Enter a Covered Call Trade

Covered Calls can be a great way to collect premium from the stock market month after month.  So how do you go about entering one? You have to follow these steps.

1.       Find A Stock

Of course the first thing you want to do is to find a stock, you can’t enter a trade without it.  The stock that you pick should have good fundamentals and be trending either up or sideways.  Buying a down trending stock to do covered calls on can be very costly   because the premium you sell may be offset by how far the stock drops.

2.       Look to see if it is optionable

Before you buy the stock you need to make sure it is optionable.  You also want to look to see how much the options are trading at.  Some stocks aren’t worth looking at for a covered call play because the premium is too small.

Other stocks may give you premium of 3-5%.  These are the stocks that are better fit for selling options.

3.       Buy the Stock

Once you find a good candidate you are ready to enter the trade by buying the stock.

4.       Sell an option

Next you want to look at the different options and decide which one you want to sell. You should consider how long you want to hold into the stock.  If you only want to hold the stock for this one trade consider selling an at the money or in the money option.

If you want to stay in it a little longer, or profit from the appreciation of the stock you can sell the out of the money options.

5.       Plan Your Exit

Once you are in the position you should have a plan on exiting it.  Of course if the stock goes up you will be call out of the position for a profit.  But it might not go up; you have to decide what you will do in a worst case scenario.

If the stock turns against you will you keep holding it for the long term, or will you have a Max loss which you close the position completely? It is very important to have a plan.

For more on Covered Calls visit http://www.stocks-simplified.com/covered_calls.html