Professional Options Trading Course

Lesson 4: Selling Covered Calls

Adam Khoo Bang Pham Van

Professional Trader Options Trader & Specialist

www.piranhaprofits.com
www.wealthacademyglobal.com
Strategy 3: Selling Covered Calls
Purpose:
• To Generate Additional Income from Your Stock Investment Portfolio
• Capital Gain + Dividends + Option Premium = Higher return on Investment

Strategy:
• You hold shares in a fundamentally strong company (at least 100 shares)
• In the long run, you are confident it will rise in value
• In the short term, while the stock is going sideways, down or moving up slowly, you SELL ‘Out of the
Money’ Call Options to Collect Premium
• Sell 1 Contract Call Options for every 100 shares owned
• Collect the Premium and Repeat this process every 30-45 Days to Generate an Additional Stream of
Income

Coke (KO) Long term, Sell KO 51 Calls at $1.50

fundamentally strong company $50.50
Strategy 3: Selling Covered Calls

If….
a) KO shares remain at or below $51, the options
expire worthless and you keep $1.50 x 100 = $150 Sell KO 51 Calls at $1.50
$50
b) KO shares go above $51, the Call Options are ITM.
You are obligated to SELL your 100 shares at $51. Your
upside capital gain is limited but you still keep the
premium.
* note, you can always buy your shares back if they are
exercised by the call buyer and your shares are ‘called away’

Profit Profit

Stock price $49.50 $50$51 Stock price

$50

Loss Loss
 Case Study - Sell Covered Call
• You own 100 shares of INTC in your portfolio. Current value $47.08 x 100 = $4,708
• Currently trading at $47.08, you notice it is moving sideways and have a bearish bias
• You decide to Sell 1 contract of INTC Feb 48 Calls at $1.83
• What is the total premium collected? _____________

• % Return is _______ in 40+ Days

• Potential % Return ________ a year (x9)
 Stock Selection

• Only write covered calls on fundamentally strong stocks that will rise in value in the long run
and ETFs (e.g. SPY, DIA, FXI etc..)
• Ideally, Dow Jones 30 Stocks (e.g. MCD, DIS, V, KO, PG, BA, PEP etc…)
• Avoid Biotech and Pharmaceutical Companies
• Avoid selling calls during Earnings Announcement
Entry Strategy

• Ensure the Stock is Moving

Sideways or Trending Down
• Sell Call Options when
Implied Volatility is High (IV
Percentile above 40-50 ideal)
OR when you can get at least
1.5% to 2% ROI
• Sell the Call at 1-2 STRIKE
OUT OF THE MONEY
• Delta (0.4 to 0.5)
• 30-45 Days to Expiration
 Risk -Return Chart
• You own 100 shares of YUM at Current price $94.13
• You Sell 1 Contract YUM March 95 Calls at $2.40

Sell Calls 95 Strike

Current price $94.13
 Risk -Return Chart

Max Profit =
Strike Price - Stock Price + Premium Max Profit = $327
$95 -$94.13 +$2.40 = $3.27

Loss = Loss of Holding the Stock

+ Premium ($240)

Current price
$94.13
Call Strike
$95
 Exit Covered Call Strategy
Scenario 1: Stock Price Falls Far Below Strike Price Near Expiration
• Let the option expire worthless -> Maximum Profit = Premium Collected
• Sell-to-open a new call option (1 Strike OTM, 30-40 Days to expiration)

Scenario 2: Stock Price is Above Strike Price (ITM) 5 Days Before Expiration
• Roll the short call option to a new short call
• ie. “Buy-to-close” the short call option and sell-to-open a new call option at the
same time (1 Strike OTM, 30-40 Days to expiration)
• You may make a loss buying back the short call, but the capital gain from your 100
shares will be much more than the loss from buying back the call

Scenario 3: Stock Price Goes Way Above Strike Price ( Deep ITM)
• Once the Delta of the Short Call Exceeds 80, Roll the Short Call Option to a New Short
Call
• ie. “Buy-to-close” the short call option and sell-to-open a new call option at the same
time (1 Strike OTM, 40 to 50 delta, 30-40 Days to expiration)
• You may make a loss buying back the short call, but the capital gain from your 100
shares will be much more than the loss from buying back the call. In addition, you
collect new premium from the new call sold
 Exit Covered Call Strategy

Roll the short call option to a new short call – ie. buy-to-close the
sold call option and sell-to-open a new call option at the same time
(1 Strike OTM, 35-40 Days to expiration)

In February, YUM price at $94.13

Steps to Rolling the Short Call
• ‘Buy to close’ the Original Short Call Sell YUM March 95 Call at +$2.40
at Profit/loss Buy YUM March 95 Call at -$0.40
• ‘Sell to open’ a New Short Call at new
Strike price (1 strike OTM) and new In March, YUM price at $95
expiry date (35-40 days)
Sell YUM Apri 96 Call at +$2.68
 Exit Covered Call Strategy

Scenario 4: Stock Price Goes Above Strike Price, Option Deep ITM and Gets
Exercised By the Call Buyer
• Your short call will get exercised when
• a) It is deep ITM (Delta > 80) and Extrinsic Value less than $0.20
• b) It expires ITM by 1 cent
• If this happens…
• You keep the Option premium
• 100 Shares are deducted from your account and cash is credited into your account
• Buy the 100 shares back with the cash that you now have
• Sell-to-open a new call option (1 Strike OTM, 30-40 Days to expiration)
 Covered Call Advantages and Risks
• Advantages:
• Collect premium as extra monthly income (2-3% a month, 30%-35% a year)
+ dividends
• Generate 30%-40% returns on a stock, even if it moves sideways or down in
the short term
• Reduce the cost of owning the underlying stock
• Can be used to exit a stock position at a target price. And you get paid while
waiting for it to be called away
• Risks:
• Upside Capital gains are capped in the short term
• Same downside risks as holding the stock in your portfolio
CAGR 9.05% + Div Yield 2.07%
= 11.12%
CAGR 18.95%
Professional Options Trading Course
Lesson 4: Selling Covered Calls

Adam Khoo Bang Pham Van

Professional Trader Options Trader & Specialist

www.piranhaprofits.com
www.wealthacademyglobal.com