Skip to main content
No. of Recommendations: 0
Hi Ragnar,

Funny you ask. Yes, I've been looking at how to sell covered calls on lower volatile stocks. I've been playing around with it on paper only. I really haven't come up with a methodology that I'm comfortable with. The biggest problem is the same one that Denny Schlesinger ran into. Way too much opportunity loss.

The one thing that I have locked in on is that you really have to sell them weekly. If you sell the calls further out, you're just increasing the possibility of the stock getting assigned. The other thing is that it looks like it works better with higher priced large cap stocks. From what I've seen so far stocks priced at $80 and above work better. You can actually have demand at 0.2% - 0.4% premium levels. At 0.2% without compounding you'll get a 10.4% annual return. Plus, if you start selling at premiums at $0.05 or less the commissions start to take a bite out of the profits.

I don't know how the option market acts around the ex-dividend date. I probably wouldn't sell options that week, or around earning dates. I would think that would be the most volatile time periods. By eliminating those time periods that might cut down on the opportunity loss. I don't know but it seems logical. If you do that it would cut the 0.2% weekly return down to 8.8% annually.

Thinking about it a different way. Let's say we want a 4% annual return on covered call premiums. If we actually could get around 8.8% that would allow us to have ~4.8% in opportunity loss during the year and still meet our goal. That actually might be something to look at.

Thanks for the question. It made me think deeper about this. If you do something I'd like to see what you come up with. Like I said on an earlier post, it's almost limitless what you can do. I'm still a neophyte with this so take that into consideration.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.