| You would normally think of covered call options | | | | If the stock reverses and unexpectedly continues |
| trading as something you would be inclined to do in a | | | | north until expiry date, your shares will be called |
| bull market. You look for a stock that is on the rise, | | | | away at the lower strike price. You will make a loss |
| or one that you expect to at least stay in a tight | | | | on the shares but this will be neutralised by the |
| trading range in the short term, sell covered calls | | | | higher call premium you received. Your profit should |
| above the price you paid for the shares, collect call | | | | be only the amount of "time value" above the |
| option premium and possibly also make a gain on sale | | | | "intrinsic value" in the call options at the time you sold |
| of the shares if called away at expiry date. | | | | them. |
| This is a more aggressive approach and a great way | | | | But in a falling market the stock is likely to reverse |
| to do covered call options trading when the market is | | | | after the pullback and continue south. If the stock |
| generally bullish, or you have good reason to believe | | | | falls rapidly, consider buying back the call options and |
| the stock you have chosen is going up. | | | | selling more call options at a lower strike price to |
| But can you still consider covered call options trading | | | | increase the yield. You will make a profit on the |
| when the market is in a primary downtrend? Yes you | | | | options you buy back because their value will have |
| can! If your view of the stock is, that it is more likely | | | | decreased and the delta will be working for you here. |
| to fall before expiry date, you can still make a profit. | | | | If you now sell more in-the-money call options at the |
| You take the conservative approach and this is how | | | | lower strike, this premium will contain some time |
| you do it. | | | | value, plus provide you with further downside |
| If you're doing a buy-write, first take note of the | | | | protection for the shares you have purchased. |
| chart patterns and observe the highs and lows as the | | | | You can do this several times a month if your timing |
| stock trends downwards. Try to purchase the stock | | | | is right. You can also consider selling covered calls for |
| as close as possible to the next "low" in the trend. | | | | the next month out as part of your strategy. |
| This would usually be a support line, or a similar | | | | Here's an example: |
| distance from the previous trough up to the peak | | | | You have bought shares and sold in-the-money call |
| before it. | | | | options over them for a premium of $1.50 per share. |
| So you have now bought the stock. Next thing to do | | | | In two weeks, the share price drops and the value |
| is sell covered calls at a strike price that is UNDER | | | | of those call options is now only $0.25 per share. You |
| the current market price of the underlying stock. | | | | buy them back and sell covered calls on the same |
| These are called "in-the-money" call options. They will | | | | stock at either a lower strike price or for the |
| contain some "time value" but also some "intrinsic | | | | following month expiry, for around $1.50 again. You |
| value" in the option premium. As a consequence, the | | | | have made a profit of $1.25 on the first lot of sold |
| premium you receive will be substantially higher than | | | | calls, plus received another $1.50 on the second lot - |
| if you had sold out-of-the-money calls and will provide | | | | a total of $2.75 per share which you can use to |
| you with greater downside protection should the | | | | either protect against further falls or contribute |
| stock fall further. | | | | toward your overall profit. Numbers like this would |
| You're not in a hurry when you're selling covered calls | | | | apply to lower value shares where the option |
| this way. You have until the near month expiry date | | | | premiums are not so high - you just increase the size |
| to decide what to do next. | | | | as the share value increases. |
| Let's say that as expected, the stock rises in a short | | | | But covered call options trading on stocks priced at |
| term pullback over the next week or so, before | | | | less than $30 per share creates a higher percentage |
| continuing the downtrend. At this point there is | | | | covered call option premium yield than on higher |
| nothing to do. Your position is still in profit, even | | | | priced stocks. So this is a recommended part of your |
| though it is smaller than if you had sold | | | | strategy. |
| out-of-the-money calls. The higher the stock rises, | | | | Making a regular income from covered call options |
| the further in-the-money the sold call options will go. | | | | trading is just as possible in a falling market as it is in |
| There will be more "intrinsic value" than "time value" | | | | a rising one. It's simply about adapting your strategy |
| now, as the delta increases. | | | | to current market conditions. |