Alan answers a question coming from Dan of Toronto, Canada. Dan writes… "I’ve only used out-of-the-money strikes when selling covered call options, but I see you use in-the-money strike prices as well. How do you determine which is the nest strike price to use?"
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Hi Alan, I have a dividend income portfolio that includes 22 stocks I consider good candidates for covered call writing. In your book you recommend selling O-T-M calls with a 1 month ROO objective of 1.0 – 1.5%. However, the option premiums for strikes that are approximately 5% above the current stock prices for the 22 equities are very low, yielding an average ROO of about .4%. It seems this is not a good strategy for earning additional income. Would you care to comment on this?
It appears that the objective here is “portfolio overwriting” where we seek to retain the shares, allow for share appreciation, capture dividends while generating additional income by selling call options.
Here’s what we do:
1. Set an annualized return goal over-and-above the dividend + share appreciation profits (losses). Let’s say it’s 6% (the goal I use in my book, “Covered Call, Writing Alternative Strategies”).
2. If selling Monthlys, we are seeking 0.5% per month. We check an option-chain for each security and look for out-of-the-money strikes that generate 0.5% for that month.
3. Avoid ex-dividend dates and earnings reports as detailed in my books and DVDs.
4. 1% – 1.5% per month may be too aggressive for portfolio overwriting and not aggressive enough for traditional covered call writing.