Things You'll Need:
- Broker account
- A stock position in round lots (100, 200, ... )
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Step 1
First you must get your account approved for options trading by your broker. This typically requires you to fill out a form similar to when you opened your trading account, but shorter, maybe a page or two with stated income and stated options experience (0 years is generally okay, everybody has to start somewhere).
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Step 2
Determine your selling price. If you manage your own portfolio, you should have rules that determine your selling point. These could be based on P/E, yields, quick ratios, analyst research, etc. Regardless, there should be a specific number, like $21.50.
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Step 3
Determine whether options trade from your particular company. This is not always the case, particularly not for thinly traded units or small cap companies with a capitalization less than $100 million. If you log into your trading account and click on your company, there should be an options option (pardon the pun); click on that.
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Step 4
Find out what the options premium for call options is around the money. For instance, if your stock from the example above is trading at $14 and the one-month premium for a call with a $15 strike price is $0.30, use that as a reference.
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Step 5
If you are going to sell your $14 stock at $21.5, note that there are probably not options with strike prices specifically for $21.5. Maybe there's an option with a strike at $20 or one at $22.5. Let's pick the one at $20. Now determine what you should ask for it. You wanted to sell for $21.5, so you should demand at least $1.50, which would make your total proceeds $1.5 for the option plus $20 for the stock when it is called. However, you should also add the time premium.
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Step 6
To determine the time premium, use $0.30 from above, but realize that this was in relation to at strike at $15 when the stock was trading at $14. Therefore, you need to scale the number. $20/$15 is 4/3, so multiply that with $0.30. This means that all other things being equal, the time premium should now be $0.40.
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Step 7
Add $0.40 to $1.50 and get $1.90. This means you should sell or "write" your call options for $1.90.
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Step 8
Put in a limit order to "sell to open" at $1.90 and wait. Once triggered, your stock will eventually sell itself and you do not have to second-guess yourself or be tempted to move your sell-price because everything is on auto-pilot.









Comments
edwardvance said
on 11/11/2009 Great article on covered calls. Super writing and well laid out tips. 5* and I recommend.