Start from the Basics: Covered Calls Definition and Using Covered Call Screener!

Jesse Anderson

There are many ways to go about the investment market, and the floodgates tend to open up when talking about covered calls.  Let’s read more about the covered call definition and the best ways to use a call screener.

The concept is relatively conservative, but when done right, it can prove to be profitable.

Exercising a strategy such as covered calls would require quite a bit of learning and using a tool like a free covered call screener to make the best of it. 

Covered Calls Definition

A popular options strategy used for risk management and income generation,  covered calls require you to hold the long position in an underlying asset, known as stocks, and sell a call option on the said asset.  

Apart from stocks, covered calls are used for the trading of the options contract.  

The strategy is often used by investors who think that the underlying asset will only experience a minor fluctuation in its prices or are looking to boost the income from their stock portfolio.  

If you already own stocks or ETFs, you know that you can sell the security anytime at your convenience at the market price.  

When you implement the covered call strategy, you sell this right to the option buyer in exchange for a premium.  This sum can be determined with the help of a trustworthy free covered call screener.

The option buyer now has the right to purchase your shares on or before the option expiration date. This will be at a predetermined price or strike price.  

An important point to note here is the expiration date. Each expiration date will have its options chain listing the strike prices with puts and calls for each.  Monthly options expire on the third Friday of each month.  Many securities have weekly options as well, which expire every Friday. Learn the difference between weekly vs monthly covered calls.  

Understanding with an Example

Let’s get the hang of the strategy through an easy-to-understand example. 

  1. You purchased 100 shares at $100 per share of Company A.
  2. According to your predictions of the market, you derive that the stock market will not be too volatile in the upcoming month. 
  3. Since you would want to boost your profits and generate some income, you decide to sell a call option contract.
  4. After using a covered call stock screener and studying the market, you decide for the strike price to be $105 with an expiration date of 1 month later
  5. The premium of this particular call option is $4 per share, according to the option chain. 

Now, you will be obligated to sell your 100 shares of Company A anytime before expiration at $105.  

One of the following scenarios shall become a reality:

1. Price shoots up to $110

The option buyer will exercise the call option if your stock price increases to $110.  In exchange for the $4 premium, you sell your shares for $105 even though the market price of the stock is $110.  Although you missed out on the profit potential of about $105, you received the premium of $4.

2. Price remains the same

Since the strike price exceeds the market price (it’s out-of-money), the buyer will not exercise the option. You keep your 100 shares and the $4 premium received when selling the covered call. 

3. Price drops to $90

Just as the call option expired in the last scenario, it will do so here as well. The stock value has dropped by $10 per share.  You still keep the $4 premium. This risk management feature of covered calls partially offsets the stock loss, you’re left with an overall loss of $6 per share. 

Get a bit of help in screening your covered calls at optionDash, a covered call stock screener. With proprietary scoring systems, you reap the benefits of a calculated Value, Quality, and Trend score for each stock.

Creating a Covered Call – Tutorial to Boost Call Screener

A covered call trade will require you to follow these basic steps. 

  1. At the start of any successful covered call will have to purchase stock or use existing shares in your portfolio. Keep in mind, options trade in contracts that represent 100 shares.   You need at least 100 shares of stock to sell a covered call. 
  2. For every 100 shares you own, you can sell one call contract. So, if you were to own 600 shares, you could sell six call contracts. Since you could sell as few contracts as you want, you don’t have to relinquish your stock position entirely. Let’s say you wanted to sell three contracts after thorough analysis via a free covered call screener to.  At expiration, the stock’s price ended above the strike price.  Your broker will call away the 300 shares covered when you sold the 3 option contracts.  The remaining 300 shares would still be in your possession.
  3. You receive your option premium immediately after selling your covered call.  You can hold the contract to expiration where it will expire worthlessly or be exercised.  You can also choose to buy-to-close the contracts before expiration.  In this case, the option could be worth more or less than the premium you originally received.  The primary driver of an option contract’s price is the price of the underlying security.   

OptionDash has both a free version and a premium membership level.  Premium members can include advanced screening criteria and see our optionDash’s proprietary stock scoring systems.  Get the pricing guide for the best-covered call stock screener here. 

Final Thoughts

A trader must consider all options thoroughly before implementing the covered calls strategy

Primarily, covered calls are used when you want to earn an income through premiums by selling off calls against a stock you already own. 

If the stock stays below the strike price, you should collect the premium while maintaining your stock position.  If the price at expiration ends above the strike price, you will be obligated to sell your shares, but you still keep the premium originally received when selling your covered call.  

Once again, the strategy should be formulated after studying the market thoroughly or by using optionDash’s covered call stock screener to find income-producing trades. 

Get to know optionDash a bit more and help you in your journey towards successfully implementing covered calls!

Consistency is the key when it comes to trading, so let’s begin!

Posted in Covered Call Screener