CoveredCallTrading:

StrategiesforSmartInvesting

Profits

ByStevenPlace

Copyright©2013byStevenPlace

Allrightsreserved.Nopartofthisbookmaybereproduced

inanyformwithoutpermissioninwritingfromtheauthor.Reviewersmayquotebriefportionsin

reviews.

HOWTOGETTHEMOST

OUTOFTHISBOOK

If you’re looking for somemagicbulletorsecretformulathatwilldoubleyouraccountinonly3months,thenyou’vepickedupthewrongbook.Ifyou aren’t serious aboutlearning the concepts andframeworksneededandwantarobottodoyourtradingforyou,simplyaskAmazonfora

refundasyouwon’tfindwhatyou'relookingforhere.

But if you are committed toacquiring serious knowledgeabout options trading andhowyoucangenerate a longterm edge in the markets,then you are in the rightplace.

However, you can’t just readyourwaytofinancialsuccess.Your financial education

needs to include books,videos, interactive webinars,andactual experience tradingthemarkets.

That is why this book hasextrabonuses.

Youwillreceive:

- a covered callspreadsheettotracktrades

- further video

trainingaboutcoveredcalls

- a covered callprocessmapforyoutouseinyourtrades

Thesekeyresourceswillhelpyoulearnaboutcoveredcallsandgiveyouthetoolsneededto become amore successfultrader. These are my gift toyouforreadingthisebook.

Getthebonuseshere

http://investingwithoptions.com/covered-call-bonuses/

WHYYOUNEEDTOREAD

THISBOOK

This book is all about howyou can become a bettertrader through stock options.Specifically, it’s aboutcovered calls and how youcanmake themost from thistradingstrategy.

I hate finance textbooks.They either go into the hardmath behind derivatives, or

stick with super high levelconcepts.Inessence,it’sveryhard to get practical,actionable information from"traditional" finance learningchannels.

Thisbookwillgiveyoureal-world applications aboutcovered calls and relatedtrade strategies, along withpotential trade screeners andrisk management techniques.That’s the extra edge you

need, and the edge that thisbookgivesyou.

To become a successfultrader, it’s not about a highwin rate or about hittinghomeruns.

It’saboutconsistency.

Coveredcallsareastrategytoreduce risk, enhance returns,and give you an edge in themarket. This strategy will

make you more consistentas an options trader andinvestor.

The problem with coveredcalls is that this strategyincludes options, whichmeans that there areadditional risks. If youunderstandtherisksinvolved,then you can look foractionabletradeideas.

And aside from trade ideas,

you need a sound strategyfrompickingtherightstocks,pickingtherightoptions,andknowinghowtomanageyourrisk. We will be going overallofthat.

I’ve taught and mentoredhundreds of options traders,soIknowwhatnoviceoptiontradersneedwhenitcomestomastering key optionsconcepts. I also know whyyou don’t even want to

considercoveredcalls.

3BELIEFSTHATKEEPYOU

FROMTRADINGCOVERED

CALLS

1. A belief that you willdouble yourmoney every 3months.

Don’tgetmewrong,therearewaystomakeatonofmoneyusing options. Stock optionscangiveyouleverageonyourcapital, and if you areaggressive enough then you

can make large returns onyouraccount.

The problem is with higherrewards, you have higherrisk. Using leverage meansyoutakeonalotmorerisk.

Covered calls give you theability to make higher risk-adjusted returns. It won’tdouble your account, butannualreturnswellover20%are feasible given the right

marketconditions.Ofcourse,returns will never beguaranteed, but that’s thesame with traditional stockreturnsaswell.

2.Abelief thatyouhave tobeaperfectmarkettimer.

Oneofthebenefitsofgettingbetter risk-adjusted returns isthatyoudon’thavetotryandnailtopsorbottoms.Coveredcallsallowyoutobuyastock

and loweryourcostbasis,soeven if the investment startsto go against you, there arewaystoadjustthepositiontoreduceyourrisk.

3. A belief that options aresupercomplex.

This goes back to the“textbook-problem” oftraditional finance books.Options are complex if youspendyourentire time trying

tosolvedifferentialequationsforoptionspricing.

But let’s leave the heavymath to the collegeundergrads and thecomputers.Youneedtofocuson the practical applicationsofcoveredcalls,andtherisksinvolved. These option risksareknownas thegreeks,andwe’ll go over all of that inthisbook.

HaveaBeliefInYourself

Mastering covered calltrading will give you asignificantedgeovertheverylong term.Having the abilityto get higher risk-adjustedreturns will set you up as amuch more sophisticatedinvestorforyearstocome.

But this isn’t amagic bullet,anditdoesrequirehardwork

and immersion into the craftofoptionstrading.

My websiteInvestingWithOptions wasstarted in the middle of amarketcrash.Ididn’tknowiftraderswouldlistentomeasIwas just some twenty-something with anengineering degree wholearned how to make moneywith options. I have becomewhatyouwouldcalla5year

overnight success, and Ibelieve that if I canmake it,socanyou.

The gap is closing betweensmaller retail traders and thehedgefundsoftheworld.Thesoftware you have access tonow wasn’t available 10years ago. Investingeducation has also come byleaps and bounds from theshady infomercials ofred/greenlighttrading.Ifyou

take advantage of theopportunity now, then youwill be set for a morecomfortablefinancialfuture.

Let’sgetstarted.

TABLEOFCONTENTS

Contents CoveredCallTrading:StrategiesforSmartInvestingProfits

ByStevenPlace

How to Get theMost Out of ThisBookWhy You Need toReadthisBook

3BeliefsThatKeepYou From TradingCoveredCalls

HaveaBeliefIn

YourselfTableofContents

IntroductionFinancialDisclaimerWhat is a CoveredCall?

RisksandRewards

Why Trade

CoveredCalls?The Downsides ofCoveredCalls

Key Covered CallMetrics.Exmple BasisCalculationsCovered CallGreeks

The MajorTradeoffs

ASecretStrategyWhat Plays toAvoid

Designing CoveredCallScreeners

ABaselineScreenerAnAlternativeList

Some Trading

SystemsA Covered CallLifecycleMap

DeltaBandTrading

TRADEEXAMPLESWRAPPINGITUP

DISCLAIMERWHERE THE

CHARTS COMEFROMQUESTIONS ORCOMMENTS?

INTRODUCTIONI first started in the stockmarket a decade ago usingmore traditional investingmethods.Theclassicbuyandhold and value approachappealed to me due to mybelief that ownership incompanieswasawaytogrowwealth.

Myapproachwasaderivative

of the Peter Lynch cliché“invest inwhatyouknow.” Iwould carry around aMoleskine notebook in myback left pocket and wouldwrite down investment ideasasIwalkedthroughamallorwhen I commuted to work.Thiswas valuable education,but I know now that thisapproachisnotsuitedformypersonalityandriskprofile.

What I know now is that

figuring out investment ideaswillonlytakeyousofar.Youcan’t justpickstockswithouta good idea about positionsizing, riskmanagement, andyes--alittletechnicalanalysisthrowninthereaswell.

I also know now that beingtoo smart can actually hurtyourreturns.Iamanengineerby trade andmy entire life Iwasrewardedforbeingright.Inthestockmarketyoumust

figure out where you arewrong, because if you don’tknow that then you can’tmanage risk. Many tradingaccountshavebeenblownoutby super-smart people whothought they could outsmartthemarket.

Luckilymymathbackgrounddid give me an edge inderivatives. I gravitatedtowards options because Iunderstandhowmarketsprice

riskandhowvolatilityworkswhen trading stocks. Myability to structure riskaround a stock using optiontradesiswheremyedgelies.

I believe that consistentsuccess in the market comesfrom the ability to systemizetrade setups. It seems thatmuch of the financial mediais about trade ideageneration-- what stock tobuy, what to sell, what hot

industry is around the cornerandsoon.Butyourarelyhearabout the framework thatleads investorsand traders tomake their decisions aboutentering and exiting theseideas.

My main trading strategiestendtobemorecomplexandmore short term, butretirement portfolios with aslightly larger timeframe aredefinitely suited towards

coveredcalltrading.

FINANCIALDISCLAIMER

Here is my commonsensedisclaimer. If you want thefull legal rundown, it isavailableinAppendixA.

As with any financialspeculation,youcanlosealotof money trading options.Because of the leverageavailable in the optionsmarkets, there are ways to

loseyourentireaccountveryquickly.That’swhyyouneedtolearnhowtomanagerisk.

I’mnotabroker,andnothinginthisbookisadviceonhowtobuyor sell securities.Youshould not take this book asthe gospel truth, and anyinvestment decisions youmake should go through afinancialadvisor.

This book is for educational

purposesonly,andthatmeansyou are personallyresponsible for your gainsandlosses.

WHATISACOVEREDCALL?

A covered call is a verysimple option position. Thisisoneof thesimplest tradingstrategiestomaster--Ibelievethat it is easier to learn thanoptionbuying!

A covered call is thecombination of buying stockandthensellingacallagainstthe stock. The process of

sellingacallisalsoknownas“writing,” which is why acoveredcallisalsoknownasa“buy-write”trade.

Let’s talk about themechanics of options so youcan better get anunderstanding of what thistradeaccomplishes.

The options market iscompletely different thanthe stock market. When a

company needs money tofund operations, they canraise capital through the saleof stock.Thestockmarket isalso known as a capitalmarket.

The options market is not acapital market-- it is a riskmarket. Two parties cometogethertoexchangerisk.Anoption buyer is looking toremove risk, and the optionseller is looking to take on

risk.Themainelementinthisexchange is the premiumthatriskisworth.

Figure1:ABreakdownoftheRiskExchangeintheOptionsMarket

The options market is thekind of an insurancemarket. If you are trying tobuy hurricane insurance inFloridainJune,youwillhavetopayahighpremium.Ifyoutrytobuyhurricaneinsurancein Oklahoma in December,you will have to pay a lowpremium.

The premium is how muchrisk is currently being pricedintothemarket.

BuyorSell?Now there are two kinds ofoptions-- calls and puts.Because of this, we can addanextradimensionof riskasyoucanbuyandselleither.

Calls give you the option tobuy at a certain price. Inexchange for this right, you

payapremium.

Puts give you the option tosell at a certain price. Inexchange for this right, youpayapremium.

Sofar,sogood,right?

There is also a differencebetween a call buyer and acall seller. The option buyergetsthelegalrighttotransactstock, and the option seller

gets the legal obligation totransactstock.

Figure2:TheTradeoffBetweenCallBuyersandCallSellers

Now remember, a coveredcallisastockbuywithacallsale, so let’s consider whatsellingacalldoes.

If you sell a call that meansyou are assuming the legalobligation to sell stock at acertain price. This tends totripupalotofpeoplebecausecall=buy,right?

That’s just for the optionbuyer.The call optionbuyergetstherighttobuy,butasacall seller you have theobligationtosell.

If you just had the call saleon,thisisknownasa“nakedsale”becauseyoudon’thavestock to transact. If the callbuyer wishes to transactstock,thenyouwouldendupbeing short stock, which isnot always the best place to

be. The naked sale is also anet short position, meaningyou lose money if the stockrises.

But thecoveredcallhasbotha long stock position and ashort call position. Thismeans the covered call is anetlongposition--youmakemoney as the underlyingstockrises.

Since we are option sellers,

thatmeanswearetakingonarisk in exchange for somereward.

The risk in covered calls isboth to the upside anddownside.Thedownsideriskis that the underlying stocktanks,whichstillleavesusataloss.

Butthereisalsoupsiderisk--becausebysellingthecallweare in effect limiting our

upside, which means if thestock rips higher, we makemoney but not asmuch as ifwehad just bought the stockstraight up. This is a riskrelatedtoopportunitycost.

Wellifwearetakingonrisk,wegottagetcompensatedforthat,right?

Figure3:OptionValuesAreSplitintoTwoComponents

Thereare twocomponents toan option price: the intrinsic

valueand theextrinsicvalue.The intrinsic value is therelationship between thestrike price of an option andtheunderlyingstock.Itshowsus how advantageous theoptionwouldbetotransact.

Anything left over is theextrinsic value. This is alsoknown as the time premium,or the risk premium. Thisextrinsic value is thepremium paid for those who

want to take on the risk, andit is the cost of insurance tothosewhowanttoreduceriskinaposition.

RisksandRewardsIn order for me to properlyexplain how covered callswork, you will get a briefoption greeks as it relates tothisposition.Wewillgointothe option greeks more indetail later,but for a full, in-depth understanding of howoptiongreekswork,checkout

my book “Option Greeks InPlain English: Mastery inUnder60Minutes.”

One cool thing about theoptiongreeksisthatcomplexpositions aggregate thegreeks-- that just means thattheyareaddedtogether.

Now while straight stockpositions are not complex,they do have a single optiongreek:delta.Thisgreekisthe

directional exposure in aposition.Thiswillalsobethemain greek to considerwhenentering and managingcoveredcallpositions.

Specifically, the delta is thesensitivity of the positionvalue relative to theunderlying stock pricemovement. Since a stockposition’s sensitivity is thesame as the stock pricemovement, the delta will

alwaysbe1.

In a covered call setup, thepositiondealswith100sharesof stock for every short call.So for the stock position,wehaveadeltaof100.

We can represent thisgraphically with a payoutdiagram:

Figure4:TheRiskinaLongStockPosition

The delta of a short call isnotconstantsoitgetsalittlemore complex whenanalyzing this part of theposition. In order to bestunderstandit,wewilllookatthe relationship of intrinsic,extrinsic,andexpiration.

Imagine today is optionsexpiration and you hadpurchase a call optionwith astrike price of $50, and theunderlyingstock is tradingat

$45.Would you exercise thecall option? Of course not--thecallgivesyoutherighttobuysharesat$50butyoucanjustgopurchasestockon theopenmarketfor$45instead.

Figure5:HowIntrinsicWorksonaCallOption

But if the stockwere tradingat $55, then it would beadvantageous to use that calloption. The intrinsic value isthe relationship between theoption strike price and theunderlyingstockprice.Ittellsus exactly how advantageousitistousethatoption.

Moneyness refers to how

advantageous it is touse thatoption. An option that is "inthe money" will have someintrinsicvalue.

Let’sgoback to the$50calloption. If the stock is tradingat $55, what kind of valuewouldyouexpect it tohave?Keep in mind that optionsdealin100-shareincrements.

Atleast$5.00,becausethat’sthe difference between the

stock price and the strikeprice. If itwere any less, themarket makers wouldarbitrage the play by sellingstockandbuyingthecall.

What would happen to thevalue of the call if the stockwent from $55 to $56? Theoption value would rise by$1.

In fact, at expiration theintrinsic value follows a 1:1

tracking,justlikelongstock!

Nowwhat about options thatare “out of the money”?These are options that haveno advantage to exercise atexpiration. If the stock istrading at $45, then our $50strike call option doesn’t dousanygood.

And what happens to theintrinsic value if the stockrises from $45 to $46?

Nothing,becauseit’sstillnotadvantageous to use theoptiontobuystock.

So at expiration, the intrinsicvalue follows a 0:1 tracking,as if there were no exposureatall!

Notice how we are onlytalking about intrinsic value.There is another componentcalled extrinsic value, whichisrelatedtotheriskpremium

in the option. But since weare at options expiration,there is no time value in theoption, and therefore no riskpremium.

Sohere’swhatweknow

- 100 shares of stockwillalwayshave100deltas

-"in the money" callsat expiration will have 100deltas

- "out of the money"callsatexpirationwillhave0deltas.

Figure6:OpexPayoutofaShortCall

And since the directionalexposure is in aggregate, wecan simply add up the twopositions together to get thepayoutforacoveredcall:

Figure7:ConstructingaCoveredCallPayout

Butwhatifwewanttomodela position payout beforeoptions expiration? What doweneedtoconsider?

Remember that long stockdoesn’t change. 100 sharesare100shares.Soallweneedtodoisfocusontheshortcalloption.

Up until now, we’ve beendiscussing how a call actsaround options expiration.

This is sowe can isolate theintrinsic value. But now weneed to look at the extrinsicvalue,alsoknownas the riskpremium.

The extrinsic value iswhatever is left over in theoption price after intrinsicvalueis lookedit.This is thepremium you pay to buy theoption, or the premium youreceivetoselltheoption.

The option market is a riskmarket, and the extrinsicvalueistheriskpricing.

I don’t want to step youthrough big ugly equationsthat show how risk is pricedin the market-- we just needtoknowitisthereanditaddstothevalueoftheoption.

Here is what a covered callpayoutlookslikeatt-0--thismeans“rightnow”insteadof

atoptionsexpiration.

Figure8:CoveredCallAtOpexvs.RightNow

If you notice the differencebetweenthetwo,youwillseethat you make money if thestock moves higher butdoesn’tmoveatall.Youalsocan lose money if the stocksells off, and you can losemoneyfasterifthestocksellsoffveryquickly.

With that description we

knowthatthispositiongreeksare:

- long deltas (youmakemoneyifthestockgoeshigher)

-longtheta(youmakemoney if the stock doesn’tmove)

- short gamma (youlose money if the stockmovesfast)

Wewilldiscussthegreeksindetaillater.

RiskAndRewardWhen you trade options, it’snot just about knowingwhether the stockwill go upor down. It’s about how fastthestockwillmove,andhowlongitwilltaketohitcertainpricetargets.

So we can consider twoadditionalfactors-price,and

volatility.

A covered call is bullish onprice, it means that yourrisk/rewardistiedtothestockgoinghigher.

Also, a covered call isbearish on volatility. Thismeans your risk/reward istiedtohowfastthestockwillmove.

WHYTRADECOVERED

CALLS?

From looking at the payoutdiagram above, you shouldhaveaprettygoodideahowacovered call will operate.With that in mind, you canlearn about themain reasonswhy covered calls are anattractivetrade.

1. You don’t have to be a

perfectmarkettimer.

Becauseyouaresellingacallagainst your long stock, thisgivesyoua lowerdirectionalexposure, which reduces thevolatilityinaposition.Ontopof that, the position makesmoneyover time, even if thestock doesn’t really move.Thecovered call givesyouawaytoreduceyourbasisinaposition, so trying to “nail atrade” doesn’t matter as

much. This has a profoundimpact on your traderpsychology as you no longerfeel forced into a trade orworrythatyouarechasing.

2. Better risk adjustedreturns.

By reducing your risk andincreasing your potentialreward, you have the abilityto gain a further edge in themarket. If you combine

covered call tactics withsound asset selection thenyou have the formula for agreatinvestmentstrategy.

3. Reduce your basis overtime.

There are times in a coveredcallwhere you can close outtheshortcall foraprofit andopen up a new short callfurtheroutintime.Thisgivesyou the ability to reduce the

cost basis in your positioneven further, therebydecreasing your risk andincreasingyourreward.

4. Does great in choppymarkets.

Stock markets tend to havetwo or three really goodtrends in the year, and thenare directionless as marketdistribution comes into playas well as sector rotation.

Covered calls do really wellin this environment as youcanmakemoney even if themarketgoesnowhere.

Essentially, if you can get agood feel for when a stockwill rise, you don’t have tohave a perfect entry and canstillmakemoney.Couplethatwithasolidriskmanagementsystem and you’re set for astrongerportfolio.

But,thereisaproblem....

THEDOWNSIDESOF

COVEREDCALLS

Justlikeanyotherinvestmentor trade out there, coveredcalls are not a perfectstrategy. In fact, it’s a goodidea to have some discretionabout the trade, and usemarket context to dictatewhethercoveredcallsare thebest idea. Here are somedownsides of covered calls--learning to avoid these

downsides will make sureyouonlyselectthebesttradesavailable.

1.Yougetlimitedupside.

A covered call position is anet option selling position.You are a receiving apremium in exchange forreducing the upside risk inyour position. Most tradersdon’t even consider upsiderisk, but it can have a

significant impact in yourtrading.

Let’s say you are long stockat$50andyou short the$55call. If the stock farts around(technical term) ormoves up$5thenthiswasagoodtrade.Butifthestockgetsacquiredandjumps$70,thenyouhavea problem. Sure, you mademoney, but you also missedout on further upside gains.There is an opportunity cost

to consider when tradingcovered calls. If you thinkthere ismuchmoreupside inastock,thenyouneedtotaketheothersideofthetradeandgolongcalls.

2. Covered callsunderperform in big bullmarkets.

This is an extension of theprevious point. If the stockmarket enters some brave

new world where stocks aremoving up 3-5% daily, thenyour covered call strategywillhaveyoumissingoutonalotofgains.Thereisatimeto be aggressive with risk,andtimestobeconservative--there is no easy way todistinguish between the two,and I believe that theunderstanding of marketcontext comes throughexperience.

3.Newpsychologicalissues.

Because you are now shortvolatility and short gamma,you will run into what’sknown as “mean-reversionbias.” This often happenswith option traders whoalways think the market hasgone up too far or down toofar, and are often late to thetrend. I know this, because Iamoneofthem.

There is also somethingcalled “anchoring bias” withyour short call. If you sell a65 call against stock, yourmind will now be imprintedwith that 65 level, even ifthere is no clear marketstructure around it. Timespent too far away from thatnumber will be met withmentalanguishasyouwanta“perfectpin”atthatlevel.

4.Fallingintoavaluetrap.

Just because a stock isoversold doesn’t make it abuy. And just because youcan use covered calls toreduce your basis doesn’tmeanyoushould.Bewaryof“value traps” -- stocks thatstart to look appealingbecause they’ve been hitaggressively by sellers.Sometimes the sellers arejustified and the stockcontinues with its downwardmomentum.

Using covered calls as aninvestmentortradingstrategyisagreatidea,butnotalwaysthe best idea. Learning toidentify riskier marketenvironments-- both upsiderisk and downside risk--willhelp you decide whetherbeing an option seller is thebestchoiceatthattime.

KEYCOVEREDCALL

METRICS.

Let’s now talk aboutimportant numbers toconsider when looking forpotential trade candidateswith covered calls. We willfirstcoverthedefinitions,andthen go directly into someexamples.

Ifyoudon'twant tocalculate

these by hand, don't worry--your options brokerage cancalculate these for you, oryoucanusetheCoveredCallspreadsheet provided to youinthebonussection.

TheBasis

In normal stock trading, thebasisisshortfor“cost-basis.”Itisthevalueoftheposition.Ifyoubuy100sharesat$50,yourbasisis$50.

Ifyoubuy100 shares at$50then buy another 100 sharesat $45, your basis will be$47.50.

Withcoveredcalls,yourbasisiscalculatedastheinitialcostof the stock minus thepremiumthatyoureceive.Donote that the calculationdoesn’t include the overallvalue of the option, becausetheintrinsicvalueisrelatedtothestockprice.

The basis calculation iscalculatedconditionally:

If the option is OTM, thebasisisthevalueofthestockminusthevalueoftheoption.We can do this because theentire option value isextrinsicvalue.

IftheoptionisITM,thebasisis the strike price of theoption minus the extrinsicvalueoftheoption.

Figure9:FindingtheBasisforaCoveredCall

There are other methods tocalculate the basis, but I

choose thisway because youwill understand covered callsbetter if you focus on theextrinsic value in the optionand how extrinsic changesovertimeandoverprice.

TheReturnonBasis

The RoB is critical tounderstanding risk, reward,and odds. If you are puttingon a ton of risk for notenough justifiable reward,

then the trade may not beworth it. But if the extrinsicvalueishighenoughtomakethecallsaleworthit,thenyouwanttotakethetrade.

To calculate the return onbasis,wemust figureout themax return the covered callcan receive. Because thereward in a covered call islimited, this is fairlystraightforward.

Maximum return is thedifferencebetweentheoptionstrike and the basis. This iseffectively the highesttransactional value that youcanreceive.

Now if your call is "in themoney" (ITM), itmeans thatthe value of the stock ishigher than the value of theoption strike. Itmay seemasthoughthetransactionalvaluewouldbe lower.But because

we calculate the basis forITM options a littledifferently, then this issue isworkedoutfairlysimply.

Figure10:CalculatingtheMaxReturn

Aquicknote: ifyouownthe

stockduringadividend, thenyou will need to include thedividendineitherthebasisorthemaxreturn.

Now to calculate the returnon basis, you simply dividetheMaxReturnbytheBasis.This will give you apercentage.

Figure11:CalculatingtheReturnonBasis

This value will tell you themax net return that you willreceive, and it can also be agoodguideastowhetheryouwanttoenterthetradeornot.

If a covered call gives you areturn of 3% but you thinkthestockwillmovehigherby6%,thenyouwanttojustbuythe stock and maybe roll itintoacoveredcalllater.

Calculating the return onbasis gives you a morepractical approach whenvaluing options, especially ifyou haven’t fully graspedexactly how options arepriced.

EXAMPLEBASIS

CALCULATIONS

Let'stakealookatapotentialtradeinFreeportMcMoran&Gold(FCX)

Thiscoveredcalliswherewebuy 100 shares of FCX at apriceof36.78andthensell1Dec 37 Call against it for1.20.

This trade makes money aslong as we stay above ourbasis before Decemberexpiration.

Tofigureoutourbasis,allwehave to do is subtract the

value of the option from thebuypointofthestock.

36.78-1.20=35.58

To calculate the max return,simplytakethestrikepriceofthe call and subtract it fromthebasis:

37-35.58=1.42

So thatmeans you canmake$142atmostonthisplay.

Placing the max return inpercentagetermsisimportantso you can analyze differentstocks with different pricesand volatilities. Let'scalculate the return on basis(RoB):

1.42÷35.58=0.039→3.9%

Thismeansthatifthistradeissuccessful you can makeabout 4% return on yourcapital.

These are the main metricsyou will be dealing withwhen using covered calls.Let's take a look at someothercalculations:

AnnualizedReturnonBasis

Thisvalueiswhatyouwouldexpect to make if you wereable to take a single coveredcall tradeoverandoverforayear. If you had a coveredcall thatgaveyouanRoBof3% in 30 days, then theannualized return on basis is36%.

These calculations are doneautomatically with most

option software. Here is anexamplefromTDAmeritrade(thinkorswim):

The left hand column shows

us the "Covered Return,"which annualizes outpotentialreturnsfromthecallsale alone. It is a functionofstrictlytheextrinsicvalue.

The "Max Covered Return"shows you the annualizedgains of both stock pricemovement as well as anygains from upsidemovementin the stock. This is a more"idealized"scenario.

Notice that while the MaxCovered Return valuecontinues to increase, theCovered Return willdecrease. This shows us thatif we choose higher strikesfor our covered calls, moreand more gains will be aresult of the stock pricemovement instead of gainsfrom the call sale. This willbeimportantwhenwediscusstradeoffs.

If you're impressed by these"annualized" numbers, bewary. Advertisers will sneakin the annualized RoB toshow you the potential ofcovered calls, but thisassumesoptimumconditions--meaningthatthestockgoeshigher every single month.When we include volatilityand drawdowns, the actualreturns will be lower thanthat-- but still veryimpressive.

Calculating the Odds ofMaxReturn

Because of market volatility,you won’t know if you willget max return-- but withoption pricing we can figureouttheoddsthatyouwillgetthatmaxreturn.

An option delta is thedirectional exposure theoption has relative to thestock price movement. If an

optionhas adeltaof40, thatmeans forevery$1 the stockmoves, the option will moveby$40

By some mathematicaltrickeration, the option deltaisalsorelatedtotheoddsthatthe option will expire in themoney.

Figure12:Youcanseehowdelta

valuesaredirectlyrelatedtotheoddsofexpiringinthemoney

Through a little commonsense we can see how thisworks. An at-the-moneyoption will have a delta ofaround50.Wealsoknowthatat any point in time, a stockhas about a 50% chance ofgoing higher or lower-- atleast that’s what the optionpricingmodelstellus.

The more out of the moneywego,thelowerthedeltaandlower the odds. Themore inthemoneywe go, the higherthedeltaandhighertheodds.

So when will a covered callget max return? When theoption goes in the money.What are the odds we go inthe money? It’s about thedeltaofanoption.

Ifyoubuystockandsella30

delta call, the statistical oddsthat the option will expireITM is 30%, which meansyouroddsarearound30%ofmaxreturn.

Keepinmindthat theseoddsare based off mathematicalmodels. It assumes pricemovement is pretty random--ifyoucan timestocksorusetechnical analysis, you cangetanedge.

Whyisthisimportant?

Because there is a tradeoffbetween risk, reward, andodds. If you sell a higherdelta call, you will havelower directional risk, higherodds, and lower rewards. Ifyou sell a lower delta call,you will have higherdirectional risk, lower odds,andhigher rewards.This factis inescapable, and it is themain issue we address when

choosing the best options tosellinacoveredcall.

Before we can address thetradeoffs, we need a look atthe true risks of an option,alsoknownastheGreeks.

COVEREDCALLGREEKS

Whatdoyoucareaboutwhenyou trade stocks, futures,commodities, forex, andbonds? You care whether ornottheassetgoesupordown.That’s where the risk is--higherorlower.

With options there are otherthings to worry about.Becauseanoptioneventually

expires, the market tries topricetheoptionasafunctionof risk.But therisk isn’t justabout higher or lower, it’show fast and how long ittakestogettocertainprices.

These risksareknownas thegreeks. It’s about how anoption position changes overprice,time,andvolatility.

This isgoing tobea cursoryoverview of the greeks as

they relate to covered calls.For a more in-depthexplanation about how thegreeks work, check out mybook“OptionGreeksinPlainEnglish:MasteryinUnder60Minutes.”

Delta

We'vealreadydiscusseddeltain detail when it comes tohow to construct an option.But now we will see how

deltaactsinacoveredcall.

Let'sstartwithanexampleofanAAPLcoveredcall:

For quick reference-- the toplineiswhatthepositionlookslike at expiration, and thebottom line is what ourpositionlookslikerightnow.

Again, the delta of an optionis simply how much moneyyou make or lose when thestock moves. Since coveredcalls are bullish positions, itmeans this is a long deltaposition.

But delta is not constant. Itcanchange.Andthatleadsusto...

Gamma

This is where things get alittletricky.

This greek is the change indeltarelativetothechangeinthestock.

Instead of getting into heavy

math, think about thisintuitively.

Ifthestocksellsoff, thesoldoption becomes worthless,and all your exposure isrelated to the stock positionalong.

And if the stock rallies, thesold option will start tonegatetheexposure,meaningyour directional exposure(delta)comescloseto0.

Taking a look at the graph,wecanlookatthedelta--itissimply the slope of the p/lline.

By this reasoning, it provesthat your position risk is notconstant. In fact, it increasesif the tradegoes against you.That'sthemaintradeoffwhenyou are a net seller ofoptions--youfeelthattheriskisn't that great relative to thepremiums (rewards) theoptionsmarketisgivingyou.

Sowhywouldyouhavesuchanadverseriskprofile?

Thatleadsusto...

Theta

This is a greek that tells youhow much money you makeorloseastimegoeson.

Remember, options aredecaying assets-- and sinceyou are short calls, thepremiumdecayworksinyourfavor.

The theta rewards are whatmake the gamma risksworthit.

Finally there's one moregreektodiscuss...

Vega

Let's start back with afoundation that we canconstructtheconceptofvega.Anoptionvalue iscomposed

of intrinsic value andextrinsicvalue.

The extrinsic value is also

known as the risk premium.We can measure the riskpremium across assets bydoing some fancy math andwe come up with a numbercalled the implied volatility,which tells us how muchvolatility the options areimplying--simple,right?

Iftheperceptionofriskrises,then what do you thinkhappenstotheriskpremium?It goes up,whichmeans that

the extrinsic value goes upandtheoptionvaluegoesup.

Since covered calls are anoption selling strategy, youwill benet short vega. Thismeansyoumakemoneyiftheimpliedvolatilitygoes lower,and you lose money if theimpliedvolatilitygoeshigher.

When you pick covered callcandidates, you want to getinto names that you expect

volatility, both implied andactual,todecline.

There are many instances inwhichimpliedvolatilityistoolow. This means that thepremiums available are notworththerisksyoutake.

Ifyouthinkthatthevolatilityin a name will be muchhigher,thenyouwanttouseadifferent strategy that is netlongvega.

THEMAJORTRADEOFFS

Withaclearunderstandingofthe risks (Greeks) involved,you should have a goodpictureastothatthetradeoffsareincoveredcalls.Let'stakea look at some of the mainconsiderations.

Premiumvs.Risk

Ifastockoptionhasahigheramountofpremium,thenyou

can get larger returns fromsellingthatoption.

The problem is... optionpremium is "rich" for areason. Itmay have earningscoming up or may be atakeovertarget.

Conversely, the boring, low-risk stocks will have optionboards that are low-priced.Thesewill bemore "certain"plays, but the market often

prices that risk (or lackthereof)accordingly.

Inotherwords, yougetwhatyoupayfor.

There will, of course, betimes in which an optionsmarket will over orunderprice the stock'svolatility. As you developvolatilityanalysis techniques,youcanusethosetohelpgetan edge in your covered call

trading.

Thetavs.Gamma

If there is one tradeoff youwillnevergetawayfrom,it'sthe tradeoff between thetaand gamma. If a call saleoffers you amassive amountof theta (time premiumgains), it will always be tiedwithmassivegammarisk.

This is especially true when

dealing with weekly options.Due to theexponentialdecayfunction related to theta, thebulk of your theta gains willcome through in the last fewweeksofanoptionslifecycle.

But that also means you areexposed to a higher positionvariance.Thisisafunctionofhow your delta changes overtime (also known as charm).At expiration, the delta of acovered call is either 0 or

100. That means if a tradestartsgoingagainstyou rightat expiration, it will goagainstyoureallyhard.

It's what I call the gammaknifeedge.AndI'vebeencutonitplentyoftimes.

Thetradeoffis--ifyouselectacalloptionthatistoofaroutintime,itwilltakeforevertorealizeanysortofthetagains.Thebenefitwouldbethatyou

aren't stuck on the gammaknifeedge

ASECRETSTRATEGY

There's an alternative to acovered call strategy thatoffersyouthesamerisksandrewards, but with a reducedcashoutlay.

Aputsalegivesyouthelegalobligation to sell stock at acertain price by a certaintime. This is a long deltatrade, with a limited riskpayout for theoretically

unlimitedreward.

Let'stakealookatthepayoutdiagramforaputsale:

Looks awfully familiar,doesn't it? That's becausecovered calls and put salesare equivalent with respecttotherisks.

There are a few advantagesfor using put sales overcoveredcalls:

Reduced capitalrequirements. If you areusing a margined account,

selling puts will require afraction of the capitalcomparedtobuyingstockinacovered call position. Therisk here is that you can getoverleveraged,but ifyouusethat extra capitalwisely (likeforhedgingpositions) then itcanactuallyhelpyoumanageyourrisk.

Reduced Commissions.Instead of having to pay totrade stock and options, you

canjusttradetheoption.That"discount" can add up overtime.

Simpler Exit Execution. Ifyou are right on a short put,thenallyouhave todo is letit expire worthless or buy itback at a very low price.Many option brokerages willnotchargecommissionifyoubuy an option back at verylowprices.

Compare that to a coveredcall.Ifyouareright,thenthestockwill rally andyour callwill go in the money. Thisalso means that the bid/askspread will widen out (it'swhat happens to ITMoptions) which makes itdifficulttoexitifyouwantto.

When we get into the tradelifecycle, I will show youhow it's a great idea to firststart with put sales with the

potential to evolve into acoveredcall.

WHATPLAYSTOAVOID

Here is the main tradeoffwhen it comes to coveredcalls: if the risk premiumavailableinthecallsishigherthantheriskwetake,thenweshouldget into the trade.Letmeexplainalittlefurther.

Theoptionmarketisallaboutprobabilities.Wedon’tknowifastockwillgoupordown$5, but we can assign odds.

Those odds are how themarket determines the riskpremiums (extrinsic)availableintheoptions.

If the market is pricing in a$7movetotheupside,butwethinkthatthestockwillmoveup only $5, then we shouldpick up covered calls.Howeverifwethinkthestockwill move up $15, then weshoulduseadifferentstrategylikecallbuys.

A covered call position isgreatwhenyouarebullishona stock, but don't think therewill be an explosive movehigher. In more advancedterms, you think that theprobabilities of asymmetricrewards are lower, but youcan still think that stockownershipisawisechoice.

What does this meanpractically?

Let's take a few examples toshowyouwhencoveredcallsareaterribleidea.

Keep in mind that there willalways be exceptions, butthese rules hold up fairlywell.

FDAEvents

There are a select group ofstocks called "biotechs."These companies often have

binary riskaroundanevent--generally an FDA event.These companies have beenworkinghardondrugstohelppeople, but they don't knowhow well those drugs workand whether they will beapprovedintheU.S.

Often thecompanywillhaveadateinwhichtheyreleaseaclinical trial that shows theresult of those drugs. If thedrug works, it will give the

stock a massive boost as anewrevenuestreamisopenedup.However,ifatrialfailsorthe FDA rejects it, then thestock collapses as it has nopotential for future cashflows.

Because of this binary risk,theoptionsmarketwill see amassiveriseinthepremiums.This is like how homeinsurance premiums rise if ahurricaneisabouttohit.

Figure13:Dendreonisagreatexampleofbiotechrisk

Manyinvestorswillthinkthatthe "fat premiums" that areavailable make covered callsan attractive choice-- but toomany times the asymmetricrisktakesholdandwipesouta position. And even if thetradeworks, the covered calllimits the upside whichmeansyouaren'tpaidenough

to justify the risk that youtake.

MomentumStocks

Companies that have anopportunity for massivegrowth will not be the bestcandidates for covered calltrading.Itcomesbackaroundagain to the idea of risk andreward. With covered callsyou are limiting your upsidereward.

This means that if you areinvesting in a company withasymmetric rewards then it'snotthebestideatolimityourupside. Sure, you may nowhavebetteroddson the tradebutover time itwillnotbeaprofitablesystem.

Figure14:CoveredCallsWillLockYouOutofPotentialUpside

One of themain componentsofamomentumbasedtradingstrategy is to have that 10%of your investments make80% of your profits. Youcan't accomplish this usingcoveredcalls.

LowVolumeStocks

A major risk in options

trading is liquidity risk. If astock doesn't trade muchvolume, it stands to followthat there won't be manyoptions traded as you need alotofmarketparticipantsthatneedwaystoreducerisk.

The problem with lowvolume stocks endsupbeingthat if you enter an optionpositionandwanttoexit,youwon't be able to exit withgood fills. This slippage is

partofthatliquidityrisk,anditcanaddupovertime.

LowPriceStocks

All other things being equal,a$20calloptionwillbemorevaluablethana$2calloption.This means on an absolutebasis you will receive morepremium on higher pricedstrikes.

Why does this matter? It

comesdowntocommissions.

Let's say you pay $1.50 peroption contract and $5 forstocks. That means to enterintoacoveredcall,itwillcostyou$6.50.Andifyouneedtoexit,thenthat'sanother$6.50fora$13roundtrip.

If you are putting on acovered call on a low-pricedstock, the tradingcommissions will eat up a

significant amount of yourtradingprofits.

Figure15:Eventhoughthisoptionboardisliquid,it'snotworthtrading

DESIGNINGCOVEREDCALL

SCREENERS

The Problem With MostScreeners

There are plenty of solutionsout there foryou ifyouwanttofindthe"bestcoveredcall"totrade.

But many of these solutions

arelacking.

It comes back to the "fatpremium"trap.Justbecauseastock option has a very highamount of premium, thatdoesn'tmakeitasale.

But that's the starting pointfor many of these screeners.They look to maximize thereward in the covered callwithout taking into accountany sort of risk. This means

thatany listyoupickupwillbe full of companies thatreport earnings in the nearterm or are biotech handgrenades.

A BaselineScreenerTofixthisproblem,youneedto first find the best stocksfrom a risk managementperspective. These are going

to be larger cap companieswith plenty of liquidity andareinuptrends.

6 Simple Steps to a GoodStockWatchlist

KeyResource:Finviz.com--Ilovethissite.There'satonofdata visualizations that cangiveyouabetterfeelforhowthemarketistrading,aswellas screeners and tools tomakeyouabettertrader.We

will be using their freescreener in this section. Youcanfindithere.

When you first open up thefinvizscreener,youwillseealist of over 6,000 stocks andetfs.

Figure16:TheStartingBlocksforOurScreener

It would be foolish to thinkthat we can step through

everysinglestock to find thebesttradinginstrument,sowewillfirstapplysomecommonsense filters to give us abaselinestocklist.

Step1:RemoveETFs

The first one is to select"Industry -> Stocks Only."ThiswillremoveallETPsoutofthepicture--thereisatimeand place for market andsectorbetsbutwearelooking

atcompaniesfornow.

Thistakesusdowntoaround4,750stocks.

Step 2: Make Sure theyHaveOptions

The next filter to apply is"Optionable and Shortable."If the stock has no optionsthen we can't do coveredcalls,andhavingtheabilitytoshort makes sure that the

marketcanbealittlemore2-sided.

This takes us down to 3,350stocks.

Step 3: Remove LiquidityRisk

With the introduction ofweekly options and thematurationof the algorithmicindustry, the options markethas become a little bit more

"inbred."Thismeans that themajority of the tradingvolume tends towards thesamestocks.

Figure17:AnExampleofaNon-LiquidOptionsBoard

Thismeans that even thougha stock is optionable, itdoesn'tmake it agood trade.Many times a stock's optionswill have very little tradingvolume as well as a widebid/ask spread. You can endup with liquidity risk,meaningthatexitingthetradewillbeverydifficultandyouwillincurfurtherslippage.

To reduce this risk, we willapply a volume filter:

"Average Volume -> Over1M"

Ifthestockhasademandforliquidity, it often means thattheoptionshaveademandforliquidity.

This takes the list down to1,000totalstocks,butwecangofurther.

Step4:HigherSharePrice

Due to the cost ofcommissions,tradingcoveredcalls on low priced stocks isnot always the best trade.Instead, focus on higherpricednamesbyapplyingthefilter:"Price->Over$10"

We are now down to around800 stocks to look at. It'sgetting a lot moremanageable.

Step5:BiggerCompanies

Smaller capitalizationcompaniesarestocksthatcangenerate higher rewards butwithhigherrisk.

When you invest in smallercap companies, the bulk ofyour gains will come frompriceappreciation.Whenyouput on covered calls, youlimit the price appreciation,soitcanactuallyreduceyourrisk-adjustedreturns.

Covered calls are best suitedto largercompanies,nothighgrowth firms. We can filterthis out by selecting "MarketCap->+Mid(over$2bln)."

We are now down to around700companies.

Step 6: Stick With TheTrend

A major issue with coveredcalls is the "value trap,"

where you think the stock islow enough to justify a wiseinvestment.

I don't have deep pockets,whichmeansIdon'thavethepatienceortheneedtostayinlosing stocks forever untiltheir value is realized.Instead, I can wait for thebigger participants do theheavyliftingformeto turnastockaround.

A simple technical filter canbe applied here: "200-DaySimple Moving Average ->PriceaboveSMA200"

This takes the list down toaround 600, and will dependon how mature the markettrend is. This is the baselinescreener.

LinktoYourFinvizBaselineScreener

Quick note: Some of thesefiltersmayneedtobeadapteddepending on marketconditions. For example, the2008 market crash led toshare price, trends, andmarket cap shrinking acrossmany stocks, so reducingthosetofindcandidateswasagoodideabackthen.

AnAlternativeList

If all you want is a list ofstockswithliquidoptions,thesimplest thing to use is thePennyPilotProgramList.

The Penny Pilot Program isan initiative by theCBOE totighten up the bid/ask spreadon option markets. Thisallows traders to achievebetter fills on their positions,which in turn (should)increase liquidity. Thesestocksarechosenbyinvestor

interest and pre-existingliquidity. So if you want tofocusonliquidoptions,thisisagreatplacetostart.

YoucanlearnmoreaboutthePPPhere.

SOMETRADINGSYSTEMS

Understanding themechanicsof covered calls is simplecompared to developingprofitable trading systems. Inthis section we will discusssome of my favorite setupsthatusethisstrategy.

PullbacksorBreakouts?

Because covered calls are ashortgamma, long thetakind

ofstrategy,Itendtofocusoncontrarian plays. There's averyspecificreasonforthis.

When a stock sells off,investors get scared. Theyeitherstart todumpthestock(which leads tomoreselling)ortheywillbuyprotection.Iftheybuyprotection, itmeansthat the demand for optionsrises, which means thepremiumrises.

By selling covered calls inthis environment, it allowsyou to sell higher premium.This means you can get abetter risk-adjusted returncompared to amarket that ismorecomplacent.

Keep inmind,bygoing longwhen a stock is selling offaggressively, it often meansthat you won't see "instant"profits.

Thetimeframeonthesekindsof trades are months, notweeks. The goal is to enterintoapositionwiththeintentofsellingoptionsagainstittoworkdownthestockbasis toverylowrisklevels.

Setup 1: Bollinger BandBuy

On a daily chart, overlay aBollinger Band with asampling period of 50 days

and bands of 2 standarddeviations.

If a stock sells off into thelower Bollinger Band, startlooking for signs of supporton a 30 minute timeframe.From there you can enter aposition.

Setup2:FailedBreakdowns

When it comes to basictechnicalanalysis,sometimesthebestbetisnottoplaythechart,but tounderstandwhateveryone is thinking aboutthechart.

There are times where a"captain obvious" supportlevel exists on a chart, and aton of discretionary traders

areanchoredontothatlevel.

Then the level breaks, and itlooks like all hope is lost,right? Not so fast. Whathappenshere is thatall thosetraders will stop out of theirtrades, but an institution iswillingtobuyatthoseprices.Thenweseea sharp reversalbackabovethatlevel,leavingthe new stock holders in apositionofpower.

This "failed breakdown"strategyisagreatopportunityto put on a covered callstrategy.

Setup3:BuytheBlood

The final setup to observe ismoreofamarketbasedsetup.This is a good timingmechanismifyouarewaitingfor a general oversoldindicatortooccurinequities.

In this setup we look at theVIX,whichisthesupplyanddemand for S&P options.When theVIXspikeshigher,it often indicates fear in themarkets-- but we don't stopthere.

Like the failed breakdownstrategy, we are looking forsmart money and dumbmoney.

Thefirstthingtolookforisa

statistically significant moveabove the upper Bollingerband - 20 day samplingperiod this time. The firstspike in the VIX is oftensmart money getting readyforadownsidemove.Weusethat candle's high as areferencelevel.

Thenextthingwelookforisapullback,thenaspikeabovethat reference level. This isthe equivalent of a jab, right

hook-- the first hit isn't thatbad, but the followup can bedownrightnasty.

This second spike isindicativeoftruefearcominginto the markets. This is the"blood"wewere lookingfor.From here, it's often a goodspottogoshoppingforstocksthat you've been wanting topick up for a while butwanted to wait for a goodentrypoint.

SetupWarnings

Just remember, that thesesetups are not always perfectand won't guarantee successin your trading. You mustfigureoutyour risk toleranceand build systems that arerightforyourtradingstyle.

ACOVEREDCALL

LIFECYCLEMAP

Imaginethatyouwanttobuya stock, then sell it for aprofit.Yourstock investmentlifecycle would looksomethinglikethis:

Pretty simple, right? If youwanttogetmoreactiveaboutit, a proper lifecycle mapwouldlooklikethis:

When it comes to options

trading it gets a little morecomplicated because we aredealing with more than juststock, we have to includeoptions that are much moredynamic in terms ofdirectional exposure. Youwill also have to deal withpotential assignment issuessinceyouareshortoptions.

In order to fully grasp theprocess, let's build out theentire lifecycle map from

scratch. First, we begin withopening a cash-secured putsale.

Now there are a fewoutcomes to consider fromthistrade.Wecouldclosethetrade out entirely, or it couldexpireworthless:

You could also get assigned.Whenyouareshortaput,youhave the obligation to buystock.Soifyouareassigned,

then you will end up withlongstock.

Andyoucouldalsoadjustthe

trade by rolling the short puttoanewcontractthatislowerinpriceorfurtheroutintime.This leadsyou tostillhaveashortput.

Ifweendupwithlongstock,wecanthensellacallagainstit and further reduce our

basis:

Now from here we are onlygoing to look at the covered

call lifecycle. Assuming ourstock position stays constant,weonlyhave toworry abouttheshortcall.

So what are the possibilitiesforourshortcall?

Well,wecangetassignedonourshortcallposition.Thisisknown as getting "calledaway,"and it justcausesyoutoexittheposition.

You can also have the shortcall expire worthless, andthen you can decide to exitthe trade, keep just long

stock, or cover up withanothercall.

Youcouldalsotakeyourpre-existingshortcalland"roll"ittoalongerdurationcall.

Sofromherewehaveaprettydetailed map of all thepossibilitiesandpermutationsthat are available during thelifecycle of a covered call.This may seemoverwhelming,but rememberyou don't have to deal witheach of these possibilities atonce--youjustneedtoknowwhereyouareonthemapandwhat the next available stepis.

From this map we candevelopconditionsthatwouldrequireyoutomovefromonecondition to the next.This iswhere it gets tricky-- if youarelookingforamagicbulletyou won't get one as eachperson has different riskcharacteristics, but we canlayout an example decisiontree that you can modify foryourownpurposes.

DeltaBandTrading

Due to some mathematicalvoodoo, we know that thedelta of an option is directlyrelated to the odds that theoption will expire in themoney. This means we canuse thedelta tobe consistentwithourentryandadjustmenttechniques across differentassetclasses.

One of the best riskmanagementtechniquesistheroll. This iswhere you closeout an option position andopen a similar optionposition, but with differentstrikesormonths.

Rollingputsalesandcoveredcalls at key areas allows youto keep your overalldirectional risk low whilemaximizing your potentialreturns. There is a ton going

on, but if you focus ontriggers around yourposition'sdelta,itcanhelptotakesomeof theemotionoutofthetrade.

Hereisaroadmaptoconsiderwhen considering a coveredcall strategy. This is brokeninto if/then statements, but ifyou want a more graphicalrepresentation, refer to thedecision tree available in thebonusmaterials.

If you want this entireflowchart in a full color pdf,signuptogetthebonuses.

TRADEEXAMPLESWe're going to go through ahandful of trades that I haveputoutonmysiteIWO.Thiswill include winners as wellashilariouslosers.

We'll start with some simpleonesfirst.

FadingRateRiskinXOM

InAugustof2013Iwrote:

Exxon Mobile has seen asignificant selloff off itsrecenthighs.

Muchofthesellinghastodowith "rate risk." As treasuryyields rise, funds go out ofhigh-dividend yield namesbecause if you can get thesame rate of return with lessrisk, then you reallocateaccordingly.That'swhy stufflike consumer staples andREITshavenotdonesowell.

But with XOM coming intolong term support, this is agood area to play some putsales.

Here'swhattodo:

Sell Oct 85 Puts for 1.10 orhigher.

You keep the credit if XOMstays above 85 by Octoberexpiration. If you areassigned,itputsyourbasisat83.90. From there you cansell a November call againstit for around 1.50, whichreduces your basis down to

around 82.50. You'll alsocatch a dividend of around0.80 next quarter, so if youinclude that into the basiscalculation, you can end upgetting a basis of 81.70.That's a great price to ownXOMfrom.

A Post Earnings Fade inTGT

InSeptember2013Iwrote:

Afteranot-so-stellarearningsreport,TGThasdroppedover12% back to levels not seensinceMarch:

The stockhas abit of a bearflaglooktoit,butIthinkanyfurther movement to thedownside will give you agood opportunity to sellpremiumandgetagreatbasison this stock for a long termhold.

Here'sthetradeIlike:

Sell TGT Oct 62.5 Put for1.15orhigher

SoifTGTdropsunder62.50then you get assignedwith abasis of 61.35. If you canpick up a November call tosell against your stock and itputs your basis in the 60s.From there you catch adividend and it puts youaround 59, which is a greatpricetoownthisstock.

Statistically Oversold inTLT

The short bonds trade ishilariously obvious by now.I'm sure Bill Gross is nowbooked solid on CNBC totalkislongbondbook.

And don't get me wrong,treasuries have been hit withatonofvolatility.We'vehada 30-year (40?) secular bullmarketinbonds,andI'msuremany still believe the risk-freenessofTreasuries.

But with that context, checkout a weekly chart of ZB(bond futures) with a 20-weekrollingreturnindicator:

[Note: This indicator isavailable in the Bonusmaterials]

The rate of change over thepast 20 weeks is prettyunprecedented. And I thinkthatyoucangetawaywithacash-securedputsale:

SellTLTOct100Putfor1.05orhigher

You sell an Oct 100 put forabout a dollar and you got abasis of 99. If assigned, youthensellanATMcallagainstand itputsyourbasisaround97.50.The etf has amonthlydividendofaround.25soyouare down to around97.25. Ifyou do that a few moremonths and you've gotyourself a good looking longbondpositionforalong-termhold.

BuyingtheBloodinOil

InNovember2013Iwrote:

Crude oil has been hit veryhard over the past month.We're now down 10% on arollingbasis.

Given we are oversold andheading into key support inthe low 90's, this is a goodplace to pick up someexposure in USO for a longtermhold.

HereisthetradeIlike:

Sell Jan 33 Put @ 0.97 orhigher

Basis:32.03

Returnonbasis:3%

If assigned in January, wewill sell the Feb 32 callagainst,whichwillmove thebasisdownto31.Fromtherewe just keep selling coveredcalls against it until calledaway.

AvoidingdisasterinCCJ

Cameco Corporation is acompany that deals with

Uranium mining. Back in2011 thestockwasnailedonthe Fukishima incident,where atsunami+earthquake+godzilladisaster caused the nuclearfacilitytooverload.

This lead to a nasty moveovernight.

But this isn't about that time.This is about a monthbeforehand.

OnFebruary8th,Icalledoutaputsaletrade:

This trade is known as apb2bopattern, or pullback tobreakout. The idea was thatas it pulled into previousresistance,itwillfindsupportandrally.

Fortunately, the put expiredworthlessintoFebruaryopex.If I had chosen to roll the

trade out to March, I wouldhavebeenleftwiththis:

So I dodged a bullet. I gotlucky.

Butlet'ssayIgotstuckinthisposition, would it have beensalvageable? Let's gothrough a hypotheticalscenario.

It's February optionsexpirationandIdecidetorollthe put out a month in time.SoIwouldgooutandsellthe

41putfor1.10.

Assuming I want to accountfor the profits from myoriginal trade, thiswouldputmytheoreticalbasisat38.30.

Then we see a nasty gapdown to 31. I'm now at anunrealized loss of $730 perputsale.

We open up on March 14tharound32.AtthispointIcan

decidewhether to add to theposition,rolltheputdown,orcloseitoutforaloss.Justforsimplicity'ssake,let'sassumeI just hold the short putthrough expiration and I endup with stock at a basis of38.30.

AtMarchOpex, the stock istradingat29.40.SofromhereI can sell theApr31 call for1.30, which puts my basisdown to 37.30, and if called

away Iwould be at a loss of$630percoveredcall.

April comes around, and itdoesn't look like it's gettinganybetter:

At April opex, the callexpires worthless, and I cansell theMay30callfor0.80,whichputsmybasisdownto36.50. I also caught adividend of .10, so basis isnow down to 36.40. If I'mcalled away, I'm at a loss of$640perspread.

Let'smovetoMayopex--notmuchhasimproved:

NowthattheMayoptionsareworthless, I can now sell theJunoptions.Because the riskfrom Fukishima continues tohead down, the impliedvolatilityislowwhichmeansI am not collecting as muchpremiumanymore.

Selling the Jun 28 call for0.70 reduces my basis to35.70.IfcalledawayIendupatalossof-$770.

Juneisnotanybetter:

Again, the June optionsexpire worthless, and I canrollouttoJuly.

TheJul25callsaregoingfor0.60, which moves my basisdown to 35.10. If calledaway,I'mlookingatalossof-$1100percoveredcall.

July comes around and I amcalledaway:

At the loss of $1,000, onceyouincludealldividendsandrolls.Thatsucks.

Keep in mind this was allhypothetical, and it showsyou theproblemswith tryingto play covered calls inbroken stocks. It can be averytrickyendeavor.

Nowinhindsight,"averagingdown" may have given you

fewerlosses.Butifyoudon'ttime it just perfectly, here'swhatyouareleftwith:

Couldyouhavefinallyendedupwithaprofit in the trade?Sureitwouldhavejust takenyou 18months towork yourbasisdown.

What this does is it ties upboth your investing capitalas well as your emotionalcapital. You can't focus onthebestopportunitiesbecauseyou're too busy managing adogofaposition.Sometimes

it's best to just exit out of abustedtrade.

AFailedFadeinRAX

RAX had an ugly earningsreport and was coming intokey support at its inclining200 day moving average aswellaspricesupport.

Somybrilliantideawouldbeto fade the momentum here,thinking that the nastinessfrom earnings would alreadybepricedin.

Notsofast.

Thiswas the start of a fuglydowntrend, on the back ofprice competition across theboardinthecompany'sspace.

Thetradewas:

Sell Jun 55 Puts for 3.00 orhigher

Iwrote:

Sounds like a great plan,right?

Keep in mind, that we'recurrently in February, sothese puts are longer dated,meaningwe've got 4monthsbefore we even deal withexpiration.

Here'swhathappened:

Yeah,stockgotcutinhalf.

Now this is one where I didend up averaging down, butin a very specific fashion.First, Iwent inwithhalfsizeand intent to add, sowhile itwasn't a perfect riskmanagement strategy, I stillhad some planned riskinvolved.

SoI'mcomingintoJunewith

a basis around 50. Whenassigned, the stock is tradingat 35.38. So from here, I dosomething called a "coveredstrangle," which is simply acombinationofaputsaleandacoveredcall. I sell theAug40callat1.35andtheAug35putat2.75.

To figure out potentialoutcomes,let'sbreakthetradeupabit. If thestocksellsoffunder 35, I've got a covered

callwithabasisof48.65andthen I have new stock at abasis of 32.25 (from the putsale).Thatputsmynewbasisat 40 bucks, which is a lotbetterofabasistomanage.

If the stock rallies, then theputsaleexpiresworthlessandI can get called away. I thenputthecreditof2.75towardsmy basis in the stock.Combinedwith the call sale,my new basis is now 45.90,

andifcalledawayIwillthensitatalossof$590.

BydoingthecoveredstrangleIhadtheabilitytoreducemypotentiallossesby50%.

RAX eventually traded backupabove50bySeptember. Iwish I could tellyou Iwasamarket genius and somehowrolledmyAugoptionsout toSeptember, but I was happyto be out with a not-as-big

loss.

Moralofthestory:ifyouareplaying higher-risk stocks,you may want to consideronlystartingwith1/2sizeandplan an add if you areassigned.

YHOO:TheHolyGrail

MypositioninYHOOturnedouttobeamassivewinner.Itwas a consistent, income-generating machine and thenitfinallydidtakeoff.

OnMay 20th, 2011, I calledthisout:

This was on the back ofYHOO coming back andtesting key support. ThatleveldideventuallybreakandIwasassignedwithabasisof14.78.

At June expiration, I hadstockwithabasisof14.78. Ithentookthistrade:

Sell Jul 15Calls@0.50

This would reduce my basisfurtherto14.28.

Then July comes around,YHOO is still trading in thatrange,soIrolltheJul15calls

outtotheAug15callsoutforacreditof0.66.Thisputsthebasisfurtherto13.62,andifIget called away I have areturnof10%onmybasis.

We then get some nastyactiontothedownside,butbythe time August opex rollsaround I can roll theAug15callsdownandouttotheSep14 calls for a credit of 0.40.Mybasisisnow13.22.

Duringthisopexcycle,Iendup dumping the calls forcheapandthenendupsellingthe Oct 16 calls for .70. Ihave my basis recorded at

12.52, but I'm missing thecost of the roll fromSeptember. Iwill keepgoingwiththenumbersIhave.

For some magical reason,YHOO continues to tradearoundthat14-17rangeforawhile. I end up selling theNov 17 call for 0.50 and theJan call for 1.10. I choseJanuary because theDecember options did nothave enough premium to

justifyentry.

Going into 2012 I've got abasis in the 11's for YHOO.The stock then spends thenext 9 months in the sametradingrange:

If you could pick the"perfect"kindofcoveredcallcandidate it would be this--something that is stuck in abig, dumb stupid range buthas enough premium to sellcalls against it month overmonth.

I head into the fall of 2012with a basis in the 9's. Thiscounts as a "homerun" tradewhen it comes to covered

calls.

WRAPPINGITUPAt this point you are nowfully versed in the risks,rewards, and tradeoffs ofcovered call trading. Youknow when to avoid thisstrategy and when to put iton. You have seen keytrading systems and riskmanagement techniques thatwillmaximizethisstrategy.

If you're ready to take the

nextstep,hereareafewtips:

1. Develop a trade system.You need to know why youare getting into the stock inthe first place, and thatmethodology should becomea system if you wantconsistent profits. It doesn'tmatter if you are tradingbased off a company'sfundamentalsorsomevoodoointealeaves-- justmakesureyou aren't doing it "on a

hunch."

2. Rope Up. Find acommunity of like mindedtraders that can help you onyourjourney.It'snofuntositby yourself all day with nofeedbackonyour trades.Theright forumorchat roomcanbe a great asset to yourdevelopment.

3.Geta journal.Ah, the tipthat nobody ever does.

"Logging" things is toughwhether you are countingcalories or managing a salesteam. It's hard, but you stillneedtodoit.You'llseewhatis working and what isn't.You can get a covered calljournalinthebonuses.

DISCLAIMER

No part of this publicationmay be reproduced ortransmittedinanyformorbyany means, mechanical orelectronic, includingphotocopyingorrecording,orby any information storageand retrieval system, ortransmitted by email withoutpermission in writing from

thepublisher.

While all attempts havebeen made to verify theinformation provided in thispublication,neithertheauthornorthepublisherassumesanyresponsibility for errors,omissions, or contraryinterpretations of the subjectmatterherein.

This book is forinformational purposes only.

The views expressed arethoseoftheauthoralone,andshouldnotbetakenasexpertinstructionorcommands.Thereader is responsible for hisorherownactions.

Adherencetoallapplicablelaws and regulations,including international,federal, state and localgoverning professionallicensing, business practices,advertising, and all other

aspects of doing business intheUS, Canada or any otherjurisdiction is the soleresponsibility of thepurchaserorreader.

Neither the author nor thepublisher assume anyresponsibility or liabilitywhatsoever on the behalf ofthe purchaser or reader ofthesematerials.

Any perceived slight of

anyindividualororganizationispurelyunintentional.

WHERETHECHARTSCOME

FROMAll the option data and riskanalytics come fromTDAmeritrade and theirawesome thinkorswimplatform.

Reading a book is one thing,but hands-on training isanother. Get a hold of someoptionanalytics softwareand

just spend a few hoursplaying, seeing how toconstruct trades and whatchanges around the riskprofiles.

I highly recommendthinkorswim to any newoptiontraders.

QUESTIONSORCOMMENTS?

I'dlovetohearyourthoughts.Email me atsteven@iwomail.com

NeedHelp?

I help people build wealthand live better lives throughoptions trading. Check outmy services atInvestingWithOptions.com.

OneLastThing...

Onthenextpage,Kindlewillgive you the opportunity torate the book and share yourthoughts on social media. Ifyou believe your friendswould get something out ofthis book, I'd be honored ifyoupostedyourreview.

TableofContents

CoveredCallTrading:StrategiesforSmartInvestingProfits

ByStevenPlaceHow to Get theMost Out of ThisBookWhy You Need toReadthisBook

3BeliefsThatKeepYou From TradingCoveredCalls

HaveaBeliefInYourself

TableofContentsIntroductionFinancialDisclaimerWhat is a CoveredCall?

RisksandRewards

Why TradeCoveredCalls?The Downsides ofCoveredCallsKey Covered CallMetrics.Exmple BasisCalculationsCovered CallGreeksThe Major

TradeoffsASecretStrategyWhat Plays toAvoidDesigning CoveredCallScreeners

ABaselineScreenerAnAlternativeList

Some TradingSystems

A Covered CallLifecycleMap

DeltaBandTrading

TradeExamplesWrappingItUpDisclaimerWhere The ChartsComeFromQuestions orComments?