What is a Covered Call?
If you look back at my previous post on this topic (June 20, 2020) you will find that I talk about the basics of a covered call and the elements of a covered call order. I also talk through, with still screen shots, the process I use to enter a covered call order. A link to that first video is included at the end of this post. For this post, I did a more advanced video to show how I used Fidelity’s Active Trader Pro tool to enter a covered call. That link is also below.
Is it worth my time?
This depends on your hourly rate. It takes me about ten minutes to do the work. For the three covered calls I sold, I made $84.62, and $86.60 in December, and $158.62 this month for my WMT trades. So that is $329.64 for 30 minutes of work or over $600/hour for my labor. I would have to work 40 hours at $15 per hour to earn that reward.
The Three WMT Trades
The three covered call sales are shown in this table:
| Covered Call | Per Share | Total Income | Details |
|---|---|---|---|
| WMT201224C145 | $0.43 | $84.62 | CALL (WMT) WALMART INC DEC 24 20 $145 (100 SHS) |
| WMT201231C145 | $0.44 | $86.60 | CALL (WMT) WALMART INC DEC 31 20 $145 (100 SHS) |
| WMT210108C148 | $0.80 | $158.62 | CALL (WMT) WALMART INC JAN 08 21 $148 (100 SHS) |
I set a per share price of $145 for the first two covered calls. Both of these covered calls expired worthless for the buyer. I got to keep my 200 shares of WMT. Because the price of the shares improved in January, I raised my share price to $148 and I was able to find a buyer at a price of $0.80 per share. The good news is that WMT closed January 8, 2021 at a price of $146.63. Therefore, it is highly unlikely that the buyer of my covered call will exercise the option. I get to keep the 200 shares of WMT and try another covered call sale next week.
Some Guidelines and Requirements for Selling Covered Calls
Before I sell a covered call for a dividend-paying investment, I check to see if the Ex-Dividend date is coming up in the next two or three weeks. If it is, then I want to think about the potential loss of a dividend when I enter my contract. Furthermore, I want to consider the next earnings announcement date. If the date is soon, then perhaps it is best to wait to sell the option after earnings are announced. That can work against you, however, as a poor earnings report could drive the price of the shares down. In addition, if you don’t own 100 shares you cannot sell an option. The minimum option requires multiples of 100 shares.
Be Willing to Say Goodbye
Don’t forget that you have to be willing to sell your shares. Therefore, I do not enter covered call options for stock that I want to continue to hold. I also don’t plan to sell covered call options that are trading below my cost basis. If a position is trading below my cost basis, and I want to sell it, I just sell it without using covered call options.
There is one other risk. It is the “what if ” risk. What would have happened if the Walmart stock had closed at $153 per share? I am obligated to sell my shares at $148. That could make me think “I lost $5 per share.” However, if I already decided I wanted to sell, and was planning to sell at $148, then I need to ignore the final price. Why? Because next week the shares could drop to $144 per share. You don’t have a profit until you sell.
WMT Covered Call Video (Dropbox Public Folder) TRAINING LINK for lesson two.
The video shows the actual entry of the -WMT210108C148 trade I entered on January 4th. In it I talk through the things I am looking at when I enter my covered call trade. It is quite easy. The video is about seven minutes long, so you can see my time to do the trade was less than ten minutes.
Previous Training Video Options Trading LINK for June 2020: OPTIONS LESSON ONE
Know Your Flocks & Herds 
Looks like a gamble with share price. If you have bad share and want to sell it you might end up with same bad share unsold and with lower market price and if you have good share you might end up selling it for lower then market price. In general you should end up with bad portfolio if you do these covered calls very activly with your holdings as you will not sale only ones that price decline and in most cases these are companies with some issues.
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Your observation is partially true, but only based on the idea that I am trying to sell poor investments. At some point, an individual position can become seriously overvalued. Therefore, if I own 500 shares of a company’s stock, and it has appreciated by 100% or more, I want to remove some money from the table. I might sell a covered call for 100 shares at an exit price that I deem acceptable. If the shares don’t sell, I’m not disappointed. If they do sell, then I have cash to invest in another holding for better diversification or in a new holding that seems undervalued based on my criteria. I don’t use covered calls to sell bad investments. I sell bad investments and move on.
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