Covered Calls??? ….uggghhhh… I can already see the disappointed faces of traders wanting a more exciting strategy – “Can’t you show me something where I make a lot of money really fast??”.

Truth of the matter is, covered calls have always been the place where newer option traders start their education, but never really realize how powerful this strategy can be when used properly.

Here’s the definition from Investopedia:

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

The “asset” they are referring to is usually just long stock.  The “income” is obviously the premium you sell the option for. Here’s a more detailed explanation

It becomes apparent that, like most things in trading, timing is an important aspect of this strategy. But how in the world do you time something like this? Well, one of my favorite indicators for this specific strategy is RSI.

Recipe for success:

1. Find a stock with good fundamentals trending above 200day moving average and that you want to own long term.

2. Build into your position overtime and use high RSI readings to sell calls on your position.

3. Buy back your sold calls when they have less than .20 premium left.

4. Wait for another push higher to repeat the process.

Here’s an example with some nice premium in the options. $FDX. Notice how an above 80 reading on the RSI provided some nice call-selling points.

“But what happens if the stock keeps going down down down?” – Trading is like chess, you have to think several moves ahead all the time. In the case of the stock breaking levels of support, for each of these levels you need to have a plan of scaling down your position, or keeping the core and selling calls closer to the money as the stock goes down.

“What happens though if I have my position fully covered and the stock rips higher?” – Well this is one of the things in trading which we all have to deal with….the idea of profits that could have been. The good news is that you still made money on the rip higher, just not as much as you would have if the stock was uncovered. Ok, fine. Live to fight another day. Let’s move on.

“How do I build my position if the stock is moving higher and higher…I want more at a cheaper price” – Have a look here at how to do this.

The whole idea and goal here with this strategy is work on reducing your cost basis on your overall position while the stock is moving higher – so while the direction of the stock is moving up, the price you paid for your overall position is moving down.

Remember, sometimes the turtle DOES win the race!!