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Setting Stop Loss Orders for Covered Call Writing

After entering our covered call writing trades, we immediately go into position management mode. For most of us who started our stock investment careers buying and selling stock, this may include setting stop loss orders to mitigate losses when share price declines. For example, if we purchase a stock at $40.00, we may set a stop loss order at 10% meaning we are instructing our broker to sell the shares if market price drops to $36.00 or lower.



Stop loss order: This is an order to sell a stock when its price declines to the stop price. At that point, the stop loss order becomes a market order (best available price)

Stop loss limit order: This is a combination of a stop loss order and a limit order. Once activated, it becomes a limit order which can only be executed at a specific price or better


Additional considerations for covered call writing

Since our long stock position is protecting (hence the term “covered”) our short call position, we do not want to set a stop loss order on the stock side and end up susceptible to being in a risky naked option position. Furthermore, there are several scenarios where we may benefit from closing the short call but want to retain the long stock position. An example of this would be when an overall market decline brings down the price of a stock but there is no negative corporate news. Here we may close the short call using our 20%/10% guidelines (see the exit strategy chapters in both versions of the Complete Encyclopedia and in our DVD programs) and then consider rolling down or “hitting a double”


More management possibilities

Some broker platforms offer buy-write combination forms where long and short positions can be entered and executed simultaneously. In these instances, the trades can be entered with a pre-determined stop loss price point.

Some platforms offer one triggers other (OTO) orders. These are two-stage brokerage orders, wherein we enter an initial order for a stock sale (for example), and simultaneously place a second order that is contingent upon the fill of the first order. Here we can instruct our broker to buy back the short call option and, once executed, sell the corresponding stock.


Using the 20%/10% guidelines: Nvidia (NASDAQ: NVDA) example

We can automate the buyback of the short calls using our 20%/10% guidelines. With NVDA trading at $171.02 on 8/9/2017, let’s have a look at the 30-day expiration options chain for calls:


stop losses for covered call writing

NVDA Option Chain on 8/9/2017


Initial calculations using the multiple tab of the Ellman Calculator

covered call writing calculations

NVDA Calculations with The Ellman Calculator

The calculator shows an initial return of 5.2% with the possibility of an additional 2.3% if share price moves to the $175.00 strike. This provides an opportunity for a 1-month 7.5% 1-month return.


Setting limit orders on the option side

Once both legs of the trade are executed, we can immediately set an option stop loss order using our 20%/10% guidelines. This would be a buy-to-close (BTC) order at $1.80 (20% of $8.95) in the first half of the contract and $$0.90 (10% of $8.95) in the latter part of the contract. These orders should be listed as GTC (good-til-cancelled). Should these stop orders be executed, we can then decide whether to roll down, wait to “hit a double” or sell the shares.



When setting stop loss orders for covered call writing we must factor in avoiding ending up in a naked option situation. The use of buy-write combination forms, OTO orders and stop loss orders using the 20%/10% guidelines are techniques that must be considered to accomplish this goal.


Upcoming speaking event

Orlando Money Show: February 8th –  11th, 2018

Click for information

Thursday, Feb 8, 2018
09:00 AM – 09:45 AM 
All Stars of Options
“How to Select the Best Options for Covered Call Writing in Bull and Bear Markets”


Friday, Feb 9, 2018
12:15 PM – 03:15 PM
Premium Master Classes (Paid event to Money Show)
“Basics of Options Trading Using Covered-Call Writing with Pro-Active workshop”


Friday, Feb 9, 2018 06:30 PM – 07:00 PM
Stage presentation
“Covered Call Writing with Dow 30 and S&P 500 Stocks”


Market tone

 This week’s economic news of importance:

  • Markit manufacturing PMI Jan 55.5 (expansion)
  • Markit services PMI Jan 53.3
  • Existing home sales Dec 5.57 million (above expectations)
  • Weekly jobless claims 233,000 (below expectations)
  • New home sales Dec 625,000 (below expectation)
  • Leading economic indicators Dec 0.6%
  • GDP Q$ 2.6% (below expectations)
  • Durable goods orders Dec 2.9% (above expectations) THE WEEK AHEAD

Upcoming Week

Mon Jan 29th

  • Personal income Dec
  • Consumer spending Dec
  • Core inflation

Tue Jan 30th

  • Case-Shiller home prices Nov
  • Consumer confidence index

Wed Jan 31st

  • ADP employment
  • Pending home sales Dec
  • FOMC announcement

Thu Feb 1st

  • Weekly jobless claims for week ending 1/27/18
  • Productivity Q4
  • Markit manufacturing PMI Jan
  • ISM manufacturing Index Jan
  • Construction spending Dec

Fri Feb 2nd

  • Nonfarm payrolls Jan
  • Unemployment rate
  • Average hourly earnings
  • Consumer sentiment index Jan
  • Factory orders Dec 

For the week, the S&P 500 rose by 2.23% for a year-to-date return of 7.45%


IBD: Market in confirmed uptrend

GMI: 6/6- Buy signal since market close of August 31, 2017

BCI: I have a short-term bullish approach to the market, selling 2 out-of-the-money strikes for every 1 in-the-money strike. 


The 6-month charts point to a neutral to a slightly bullish outlook. In the past six months, the S&P 500 was up 15% while the VIX (11.08) moved up by 15% but still historically low.

Wishing you much success,

Alan and the BCI team



About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

26 Responses to “Setting Stop Loss Orders for Covered Call Writing”

  1. Barry B January 28, 2018 1:44 am #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 01/26/18.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:


    Barry and The Blue Collar Investor Team

    [email protected]

  2. roni January 29, 2018 12:40 pm #

    Hi guys,

    as of today, I am finally fully invested for the Feb 16 options cycle.

    My positions are : CGNX, ADBE, WGO, DLTR, CRM, TOL, OLED, RHT, plus PANW and LOW (entered today)

    WGO and CGNX are uncovered.


    • Terry January 29, 2018 1:18 pm #

      Hi Roni;

      TOL not going good. Look for 20% rule.



      • Roni January 31, 2018 8:04 am #

        Thanks Terry,

        I have entere a bid , and will watch it closely to get a fill.


        • roni February 1, 2018 5:15 pm #


          thanks again for TOL tip.

          I got a fill today at at 18% of premium, just before the stock started to recover.

          Roni 🙂

    • Jay January 29, 2018 8:09 pm #

      Hey Roni,

      All the best on your excellent picks. Trump will be talking up defense and and infrastructure spending this week so I added to my ITA and XLB positions on some weakness today.

      Not over writing anything new at the moment due to positive earnings, tax cuts, seasonality and political cycle for now. – Jay

      • Roni January 31, 2018 8:07 am #

        Hi Jay,

        what a day yesterday, wow !! Almost a correction ?


  3. Lee January 29, 2018 8:07 pm #

    When selecting DOW or SP500 stocks for CCW, do they have to pass the IBD smart select screen? What about technical analysis? How does the stock selection differ from the run list?

    • Alan Ellman January 30, 2018 11:12 am #


      For those who want to limit their portfolios to Dow 30 (our Blue Chip reports) or S&P 500 stocks (our ETF reports…SelectSector Spdrs), the analysis is based on the elite-performers at that point in time. This is based on comparison charting so yes, technical analysis is the basis of our selections.


  4. MarioG January 30, 2018 2:14 am #

    Trading through 1/29/18 / Setting Get Out – Unwind Combination Credit Limit orders at a Profit./ My Invested List

    I am fully invested now around 92%. After Unwinding V (Visa) and CSCO (Cisco) last Friday (see story below), I invested (while the market was down 100 points) the cash in ROST (Ross) OTM 2.14%/2.25% with upside, CPRT (Copart) ITM 1.95% and MDXG (MiMedx Group) ITM 3.4%.

    Others in my 4 accounts group are FIVE (Five Below), XES (Oil/Gas ETF) , CRM (Salesforce), TSS (Total System Processing), OIH (Oil Services ETF),

    My ETF Account has: KBE (Bank ETF), KRE (Regional Bank ETF, XHB (Homebuilders ETF), and TAN (Solar ETF)

    Getting out sweetly from trades I should not have made:

    Last week I reported I erroneously bought (buy-write) on 1/24 covered calls for V (Visa) and CSCO (Cisco) since they have earnings in February1 and 14, respectively. I wanted to unload them at least at breakeven so I could reinvest the new cash in Week2. On Friday 1/26 the market was way up but these two securities hovered just below my new breakeven price, taking the Buy to Close premium into account (near identical to my Sell to Open premium)

    By looking at the time values of the entry trade (including commissions) and adding a factor for the exit commissions, I knew what time values I had to exit at to guarantee breakeven or a small profit. But how do I guarantee that with an order?

    That was no problem with V. It was an ITM trade it is a simple matter to make an order with a value of Strike – Time Value which is identical to Price – Premium paid = Credit Limit for the unwind.

    But I had an OTM trade with CISCO and there is no equivalent simple relationship between Strike and Time Value This has always perplexed me in past when I wanted to exit an undesirable trade.

    Putting my thinking hat and viewing the big picture, I found my answer. I looked at my entry Debit and Credits for my covered call and realized all I had to do was to enter a Credit Limit order which beats my Debit Limit Entry order after commissions. That worked. I placed the orders (4 positions in 4 accounts – GTC) and at exactly 3:59+pm last Friday when the market surged my four positions were filled for Cisco. Smile.

    Net Gains for V was $0.02, $-1.26

    Net Gain for Cisco was $10.86, $21.71, $0.72, $3.57

    Differences in the gains are the effects of commissions and playing the spread. Also the big difference for Cisco between the first two accounts and the last two accounts is due to the fact ETRADE charges the Base Commission rate ($4.95) for EACH leg of a combination order. Fidelity (the first 2 trades) does not.


    • Jay January 30, 2018 11:57 am #

      Good morning Mario,

      I always appreciate the time and thought you put into your posts. I learn a lot from them and suspect others do too.

      If market history and seasonality is any guide 2018 will be a bumpier ride than 2017. Mid term election year. We are already seeing some of that in the VIX. The good news for those with the time to make this crazy game a hobby will be buying solid stocks on weakness then over writing on strength should work.. – Jay

      • MarioG January 31, 2018 2:54 am #

        Thanks, Jay, for your feedback. It helps me as well to further understand things when I write them down. Funny how you learn new trading techniques as random real life events occur. There are a lot concepts involved here.

        I want to later express in a blog some views I have on Intrinsic Value and Time Value as it relates to the account value of a portfolio and the cost basis of a position. Despite reading many books, It took me 8 months of to realize what was actually happening while explaining to myself for those months something else incorrectly – which seemed to be correct and I was happy with. The numbers worked out the but the reasoning was wrong.
        Take care,


    • Roni January 31, 2018 8:32 am #

      Great stuff Mario,

      Especially when you look at the market drops on Monday and Tuesday.

      I can see that you do a wonderful job calculating all the details to the tiniest fraction. Congrats.


  5. Jake January 30, 2018 10:56 am #

    When one sells a Call ITM, which is made up of time value and intrinsic value, do you apply the 20/10% rule on the total premium collected?

    I presume, in this way, you can continue to collect premium on a declining stock.

    Lots to learn from you.

    Regards, Jake

    • Alan Ellman January 30, 2018 11:00 am #


      Yes, the 20/10% guidelines apply to the entire premium, intrinsic value + time value for ITM strikes..


  6. Alan Ellman January 30, 2018 10:31 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    This is a first for me…final edit of this report from Hawaii.


    Alan and the BCI team

  7. MarioG January 31, 2018 3:09 am #

    1/30/18 Trading:

    Executed and filled 20% Rule on XES (.15) and XHB (.11). Set BTC open orders on ETF OIH.

    The following are the actual position gains in each position after the BTC leg was closed.

    XES: -5.3%, -5.33%, -5.28%, -5.31%, -4.98%

    XHB: -1.24% (This position was rolled out last month (Strike 45 – 47 OTM) so the BTC numbers reflect a smaller net loss.)

    In my Fidelity Watchlist-Portfolio, I modified the purchase price to reflect my new Breakeven point so I could see the actual position gain taking into account the income received from options. If I ever have to exit completely, I will then know my actual gain.


  8. MarioG February 1, 2018 2:56 am #


    I have noticed the following regarding setting 20% and 10% Buy to Close order for a covered call:

    ** Each Buy to Close order lowers you available cash for trading by an amount of Premium * Contracts * 100 plus commissions and is normally listed as “Commited to Open Orders”. This cash is normally not large for each position and is normally under $150.

    ** One has to remember to change the threshold to 10% of the premium for the week before the last week of a cycle. Also you have to remember to cancel the GTC order at or before the start of the last week of a cycle, otherwise it may become a filled order from normal time value decay, wasting unnecessary cash to close the option leg for a worthless OTM trade. Maybe a more appropriate time would be 2-3 days the last week of a cycle.

    I guess one could set up a reminders with a calendar alarm or just a note to check this, or maybe set up a 3% down alert for each position and use the alert to set up the 20 or 10% rule order.


    • Alan Ellman February 1, 2018 12:48 pm #


      As always you make several good points. I normally set BTC orders at 20% after entering my initial trades. Then I make a note on my desk calendar to change that GTC order to 10% after the 2nd week of a 4-week contract and after the 3rd week of a 5-week contract. That 10% BTC order remains in place through the 3rd week of a 4-week contract and through the 4th week of a 5-week contract.

      We have a tool in the “Daily Covered Call Checkup” spreadsheet (downloads/resource section of member site) where % alerts can be set for declining stocks.


      • MarioG February 2, 2018 5:41 am #


        Let’s go to the next step. After a 20% or 10% rule execution, the stock then hopefully rises back to near one’s original premium Sell To Open price for a “hit the double” award.

        Immediate STO or Write Strategy: After the BTC for a 20% or 10% rule is executed, one could immediately create a Sell to Open (STO) GTC order for 90% of the original Entry STO premium you received. I say 90% because you can never get the original premium again for the same underlying price because of the Theta time decay factor.

        One could then re-adjust or fine tune later to a more realistic STO limit value taking into account the current Delta and Gamma of the underlying equity (Classic Encyclopedia 435-436).

        Wait then Write STO Strategy: You can also wait till a later time when you see the Stock price increasing for a possible “hit a double”. The risk here here is you may to timely place the order or miss a positive spike in the price at market open (which happens often) which then quickly decays in price, missing a fill.

        Note:The GTC Sell to Open option leg order does not affect the cash balance of an account since it is a Credit Limit. (The BTC did.)

        How do you implement the STO order?


        • Alan Ellman February 5, 2018 9:10 am #


          You did an excellent job of describing the choices after utilizing the 20/10% guidelines. I use the latter approach which is a product of the fact that for much of the day I am in front of my computer writing articles, producing videos and responding to comments and questions like this one. This allows me to monitor my positions on a daily basis. In the past (my life as a dentist, working full time outside the BCI community), I would set GTC limit orders based on time left in the contract. 90% might be appropriate early to mid-contract. When I travel, as I recently returned from Hawaii, I will use the former (GTC STO limit orders and adjust as needed).

          With the market downturn, we should also factor in our “rolling down” post BTC considerations in the second half of the contracts. Mitigating losses is equally as important as enhancing gains.


  9. Jake February 1, 2018 12:23 pm #

    Good afternoon Alan,

    I was surprised when I listened to one of your videos, that you have clients in over 80 countries. That speaks volumes!

    I took out an annual membership yesterday, as I know I can learn a lot from you.

    I fall into the more conservative category, so, I am very interested in how you manage your mothers account with ETFs. If I could ask, do you tend to keep the same underlying’s from month to month, or what criteria are you using for selection. Perhaps you have a video or a blog that would help me with this?

    FYI I was very excited this morning, when I had a GTC order at 20% when the stock spiked down at the open and I got filled, only to recover quickly. Your covered call strategy certainly softens the blow in a down market.

    Warm regards, Jake

    • Alan Ellman February 1, 2018 12:55 pm #


      I trade ETFs in my mother’s account in much the same way as I trade stocks in my accounts in that they are always populated with the very best performers at that point in time. Since earnings reports are not an issue with ETFs, some may remain in her portfolio for many months or longer. QQQ is one example that has been a frequent security in her portfolio.

      If an ETF starts to head south, it gets” bumped” for a better-performer. Position management is handled in the same way as individual stocks.

      Check the ETF chapters in my books and DVDs as well as the ETF video on the member site for more information.


  10. Justin P. February 2, 2018 7:38 pm #

    All I can say is – I’m still glad I sat out this month’s contract 😛

    • roni February 3, 2018 12:46 pm #


      very, very smart.


      • JustinP February 3, 2018 5:41 pm #

        Hi Roni,

        Not so much smart as there was literally nothing I could find that met my criteria of a strong but not overextended chart, good ROO and decent DP. Those levitating indices were also a strong deterrent. I certainly don’t like to buy just for the sake of buying so I sat this one out.


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