How to Use a Covered Call Finder
Jesse Anderson
Many option screeners are geared towards professional traders, focusing on implied volatility or option Greeks. If you trade covered calls, you have different requirements. For example, you’re probably more concerned about the quality of the underlying stock, downside protection, and if-called returns.
In this guide, we’ll briefly discuss why you might use covered calls and then show you how covered call finders can help you spot opportunities.
Understanding Covered Calls
Covered calls are a popular income-generating options strategy. By writing call options against a new or existing long stock position, you can generate a steady source of income above and beyond any dividends. Generally, covered call yields are higher than dividend stocks and just under those offered by high-yield bonds.
Covered call yields (represented by JEPI above) offer higher yields than REITs and slightly lower yields than high-yield bonds. Source: JPMorgan
The only catch is that you sacrifice some potential upside if the stock price moves above your strike price and the buyer exercises the option. For example, the JPMorgan Equity Premium Income ETF (JEPI)—a popular covered call ETF—rose 9.81% in 2023 compared to 26.29% for the S&P 500 Index. However, it lost far less than the benchmark index in 2022!
What is a Covered Call Finder?
Covered calls may seem like a straightforward strategy, but some big questions hide just under the surface. What strike price and expiration date should you choose? How do you choose the best underlying stock to write a call option on? How does the yield from a monthly call option compare to a benchmark annual yield on a fund?
Covered call finders like optionDash can help you answer these questions and more.
optionDash makes it easy to screen for covered call opportunities and access unique insights to streamline your due diligence processes. Source: optionDash
optionDash makes it easy to search for covered call opportunities based on your custom criteria. For example, you can search for options that expire in one month with a strike price that’s more than 3% higher than the current market price. Then, you can sort the results by annualized return to find the highest-yielding opportunities.
Or, even better, you can click on “Advanced” and filter stocks by their Value, Quality, or Trend scores. That way, you can use undervalued stocks, stocks with a strong financial footing, or ones with good (or bad) recent momentum. It is easy to find companies meeting your personal screening criteria. You can also sort the results by other factors, like the most downside protection while being sure to avoid upcoming earnings dates.
How to Use Covered Call Finders
Covered call finders are like a phone book. They provide a wealth of information, but they’re useless if you don’t know whether you’re looking for a plumber or an electrician. So, before using a covered call finder, you should assess your goals and priorities.
#1: Set Your Covered Call Goals
Start by setting your covered call objectives. If you want to build a long-term portfolio, you may want to look at each stock’s value and growth attributes. On the other hand, if you want to maximize yield with buy-write strategies (e.g., buying and selling stock more frequently), you might look for stock-option pairings offering the highest yields.
#2. Set Your Risk & Return Priorities
The next step is determining what attributes you want in covered call positions. If you want to maximize yield regardless of risk, you may look exclusively at if-called returns or annualized yield. But, if you’re using covered calls to create a buffer against losses, you might look at downside protection instead of raw yield.
#3. Find the Right Tool for the Job
The final step is finding the best covered call finder based on your requirements. If you’re just writing call options against an existing long stock portfolio, Yahoo! Finance’s option chains may be sufficient. On the other hand, if you want a more robust tool catering to covered calls, optionDash is one of the most powerful covered call finders.
Common Mistakes to Avoid
Covered call finders provide a wealth of information, but there are a handful of caveats you should look out for when using them to spot opportunities. Fortunately, if you’re using optionDash, you have several tools you can use to avoid these problems.
Ignoring Market-Moving Events
Ignoring market-moving events is one of the most common mistakes that can lead to unexpected losses.
If quarterly earnings are expected during the time you’re holding a call option, be prepared for the buyer to exercise the call option if there’s an upside surprise. The same idea applies if there’s an interest rate decision and you’re holding a banking stock or if there’s a new product launch and you’re holding a consumer products stock.
optionDash warns you when a stock has upcoming earnings or dividends. However, you should still look out for other market-moving events that aren’t on a set schedule.
Failing to Look Beyond Yield
It’s tempting to search for covered call positions, sort the results by highest yield, and call it a day—but that would be a mistake.
As with bonds, yields are often high for a reason! Before investing in a high-yielding opportunity, you should thoroughly research the underlying stock to ensure that there aren’t any near-term market-moving events that could lead to volatility. And, if you’re holding the stock long-term, you should consider its fundamentals.
optionDash provides access to a broad range of fundamental indicators, including a Value, Growth, and Trend score, as well as analyst opinions and other details.
Not Diversifying Enough
Diversification is essential to mitigate stock- or sector-specific risks. Since covered calls still have downside risk, you should ensure that you have a diversified portfolio. The stocks you choose should be spread across different sectors, and you should consider holding other assets in addition to equities and options.
optionDash shows you what sector and industry a stock belongs to, which can help you maintain a diversified portfolio.
The Bottom Line
Covered call finders can help streamline your covered call research process. Using tools like optionDash, you can quickly screen for opportunities based on both the quality of the underlying stock and the option’s yield. This holistic approach can help you achieve your desired outcomes while mitigating risk factors. Get started with optionDash today!
If you’re new to covered calls, sign up for the free Snider Advisors e-course. You’ll learn everything from covered call basics to strategies that you can use to adjust covered calls that go awry after you sell them. The SIM Hub trading platform can also help automate your covered call trades and help you visualize your income and performance over time.
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