Covered Calls For Dummies

We humans like lists of things to do. At the risk of oversimplification, I have recapped the factors that make a stock bad, better or best. Keep in mind that these punch lists are abbreviated and must be read in light of the above trade selection considerations.

The Most Conservative Writes

While stocks meeting all criteria usually can be found, more commonly there are trade-offs to be made. For example, the industry might be a bit weak, or falling, or the company may be a bit more volatile than is desirable. Absent news, these usually offer lower premium.

  1. You are willing to own the stock.

  2. Profitable, with strong earnings growth.

  3. Valuation is consistent with industry.

  4. Not volatile – recent historical volatility is not over 55%; lower is better.

  5. Large-cap company, industry leader.

  6. Strong average daily volume – at least 1,000,000 – higher generally is better;

  7. High Open Interest – 2,500 or more contracts open of the call series.

  8. Strong or neutral technical picture.

  9. No major event pending during current option cycle (IV not out of line).

  10. Industry is strong and not overvalued.

Writable but Not the Best – Slightly Aggressive

A stock weak in one area should be correspondingly stronger in another area.

  1. You are willing to own the stock.

  2. Profitable, but little or no earnings growth (in a climate of strong earnings).

  3. Not dangerously overvalued.

  4. Not volatile – historical volatility is not over 60%; lower is better.

  5. Established company, mid-cap in size or larger.

  6. Medium average volume (ADV) 500,000 to 1,000,000;

  7. Medium Open Interest – 1,000 to 2,500 contracts open of the call series.

  8. Strong or neutral technical picture.

  9. No major new event pending during option cycle.

  10. Industry is strong or neutral.

Born Under a Bad Sign – Very Aggressive

  1. You are not willing to hold the stock – the biggie.

  2. Loses money – very negative.

  3. Overvalued – the stock is highly overvalued.

  4. Historically volatile – industry doesn’t matter; you buy volatility, not sell it.

  5. Small company – small cap or smaller mid-caps are very easily moved.

  6. Low volume – less than 500,000 average daily volume.

  7. Low Open Interest – less than 1,000 contracts open of the call series.

  8. Negative technical picture – stock is doing worse than the market.

  9. Price has spiked above the 14- and 50-day averages.

  10. Major news pending before expiration (in light of company’s size and prospects).

  11. Industry is weak or declining – negative sign for the stock.


  1. Review the Market – you must know what it is doing technically

    1. Assess major indices.

    2. Stay generally aware of what market is doing, sector behaviors.

    3. Especially be tuned in to industries in trouble or turning around.

  2. Select a Covered Call– select candidate and expiration month.

  3. Quick Scan of Stock – look at lists

    1. Sort lists by preference (price, flat or called return, etc.).

    2. Average daily volume – prefer 1,000,000 or more.

    3. P/E ratio – profitable? Check industry-average P/E

    4. OI – ideally, 2,500+ open interest

    5. Earnings – check if report is due during option cycle, or 3-4 days thereafter

    6. Call premium – acceptable, or ominously high?

    7. Note the company’s industry

  4. Technical Scan – look at daily chart:

    1. Direction – determine trend or range; look for strength

    2. Volume – movements confirmed by volume? Bearish divergences?

    3. Moving Averages – note price interaction with averages

    4. Support and Resistance – note minor and major S&R levels

    5. Preferred – uptrend or no weaker than market

    6. Check stock on weekly chart also

    7. 10-day or less trades: check 60-minute chart

  5. Earnings – check for earnings date

    1. If earnings are due before expiration, pass (or use the earnings analysis).

    2. If earnings are in next cycle, should be at least 3 or 4 days into next cycle

    3. Best protection is strong earnings growth, how stock handles earnings reports

    4. Good preannouncement provides some comfort

    5. If price run on anticipation, stock may sell off

    6. Despite good earnings, the stock may sell off on negative guidance

  6. Fundamental Scan – go to Snapshot page

    1. Valuation – compare to industry – P/E, forward P/E, P/S, P/CF

    2. Earnings – look at earnings growth and consistency

    3. Volatility – look at volatility (25-50% preferred) and IV (10/10 rule)

    4. Fundamental rank – MSN StockScouter or other

    5. Dividends – look for steady or growing dividends

    6. Industry – health and performance of industry

  7. NEWS Scan – look for major news, if:

    1. IV higher than 10/10 or actual volatility shows significant recent increase

    2. Press releases – look for company releases: Business Wire, PR Newswire, etc.

    3. Then look at general headlines for insights

    4. The smaller the company, the more important this is

Most of these data points can be checked very quickly.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.