By writing out of the money covered calls on stocks you own, it is possible to generate almost any reasonable annual yield, plus leave yourself some upside on the underlying stock. You can receive 12 dividend-like payments per year.
The math is straighforward. In order to calculate how much call premium you need to capture in a year you need to know the stock price and your desired annual yield.
For example, say you have a $50 stock and you want a 5% annual yield from it.
You need $2.50 ($50 x 5%) per year in annual call premium to get 5% yield.
If we divide that $2.50 by 365 days in a year, you need to capture about 0.69 cents per day in time premium. Said another way, if you receive 0.69 cents per day for a year then you’d have achieved your goal of $2.50 (5%) in annual yield.
Makes Sense. So How Do We Find Time Premium Per Day?
You need to find out of the money call options for this stock where the time premium remaining is more than (0.69 * the number of days until the option expires). If the option has 10 days remaining, you need to get 6.9 cents for it (or more). If the option has 20 days remaining you need to get 0.69 cents times 20, or 13.8 cents, for it.
That seems like an awful lot of math that computers should be able to do.
You’re right. And we’ve done it for you.
Yields of 3%, 5%, or 10%
We have created new pages that calculate which out of the money options you would need to sell if you wanted a 3% yield, a 5% yield, or a 10% yield. Here are some examples for a few popular symbols:
and replace "SYMBOL" with the symbol of the stock or ETF you want.
Average Daily Time Decay
There is another way to find average daily time decay, too. Members of Born To Sell can go to the Chain page, click on Edit Columns and check the box next to “average daily time decay”:
That will cause a new column to appear on the Chain page, showing you the number of cents per day that you will collect for each option. You can click on the column header to sort by that column. And then if you know you need 2 cents per day in time premium to reach your annual yield goal then it’s a simple matter to find matching call options:
Born To Sell is pleased to offer a new series of covered call strategy and product demonstration videos for current users, new users, video junkies, and people who just want to learn more about covered call investing.
These videos are all free, and available now on Born To Sell TV on YouTube. (Be sure to click the yellow “Subscribe” button on the YouTube channel to keep up to date with new videos on covered calls. And while you’re watching it on YouTube why not “Like” it (click the thumbs up button) as well? Thanks!)
Here’s a sample (turn your sound on, it’ll be more fun):
(if you want the video bigger, click the full screen icon (4 little arrows) near the bottom of the video frame — if they’re not visible click the video to start playing and then move the mouse near the bottom of the frame and they will appear)
Here’s one talking about finding Deep In The Money Covered Calls:
The University of Massachusetts recently released a study on covered calls that examines returns on a buy-write strategy for the Russell 2000 index over a 15 year period. It is quite thorough and scientific. Highlights of the report include:
15 Years Of The Russell 2000 Buy‐Write by Nikunj Kapadia and Edward Szado (Sep 15, 2011)
“The results demonstrate that the strategy has consistently outperformed the Russell 2000 index on a risk adjusted basis, when implemented with one month to expiration calls and when performance is evaluated using standard performance measures.”
“Over the 182 month period of analysis, the RUT buy‐write strategy using 2% out‐of‐the‐money, one‐month calls generated higher returns than the underlying index (8.87% versus 8.11%) at about three‐quarters of the standard deviation (16.57% versus 21.06%).”
“One of the worst market conditions for the buy‐write strategy is March 2003 to October 2007, when the Russell 2000 experiences a high sustained growth at a relatively low volatility. Even in this market environment, we find that the 2% out‐of‐the‐money one‐month buy‐write strategy outperforms the Russell 2000 on a risk adjusted basis, returning almost the same returns as the index return at three‐quarters its volatility.”
“It is evident that if we disregard transaction costs, the cumulative growth of the ATM buy‐write strategy over the 15 years of our study far surpasses that of the Russell 2000, with less volatility.”
Kapadia and Szado’s final conclusion on the covered call return offered by the strategy of writing 2% OTM calls on the Russell 2000 index:
“Overall, our results suggest that the buy‐write strategy can outperform the index under standard performance measures. This risk adjusted outperformance also holds during the unfavorable market conditions of March 2003 to October 2007, where the Russell 2000 was steadily trending upwards. The outperformance is largely limited to writing one‐month calls while the strategy of writing two‐month calls typically underperforms both the one‐month strategy and the index.”
Making money with stocks can be tricky. If only there was an easy to use guide to show you how. Fortunately, the Born To Sell marketing department has come up with just such a thing: the Born To Sell Money Making Guide.
Filled with subtle and effective strategies rarely seen in the financial press, this simple guide offers even experienced option traders clear insight to the complex secrets of money making goodness. Presented online in all it’s money making glory, here is the guide. Enjoy…
When asked to name the greatest invention in human history, Albert Einstein is rumored to have replied “compound interest.”
Whether Einstein actually said that or not, the fact is that many smart people take advantage of it. It has been said that if you understand it then you will receive it, and if you don’t then you will pay it (usually in the form of credit card debt).
Compound interest occurs when the interest is added to the principal so that from that moment forward the interest itself also earns interest.
In the context of covered call investing, the “interest” is the option premium you receive and the “compounding” is the fact that you reinvest your gains each month.
The main advantage compound interest has is time. The longer you let it run the more impressive the results. Even a relatively modest return of 1% per month is enough to double your money in less than 6 years. Let’s take a look at various rates of return (examples assume a tax-deferred account, but even in a taxable account the results are impressive):
Initial Investment
Monthly Gain
Months Needed To Double (2x) Investment
Final Value
$10,000
1%/month
70 (5.8 years)
$20,068
$10,000
1.5%/month
47 (3.9 years)
$20,133
$10,000
2%/month
36 (3 years)
$20,399
If you have more time, you can 3x or 4x your investment:
Monthly Gain
Months Needed To Triple (3x) Investment
Months Needed To Quadruple (4x) Investment
1%/month
111 (9.3 years)
140 (11.7 years)
1.5%/month
74 (6.2 years)
94 (7.8 years)
2%/month
56 (4.7years)
71 (5.9 years)
So, if you are patient and disciplined, you could 4x your investment in 11.7 years if you can get 1%/month. That may seem like a long time but slow and steady wins the race.
Now, in the real world no one is going to achieve 1%/month for 140 straight months. Some months you’ll do better and some months you’ll do worse. But if you target slightly higher than 1%/month, say 1.3% or 1.5%/month, then the months you exceed 1% should make up for the months you come in below that.
How To Get 1%/Month?
The most conservative way is to sell short-term deep in the money calls. If you don’t want to take single-stock risk then do it with ETFs.
One of Born To Sell’s tools is called “Max Protection” which is a covered call filter where you enter your desired Annualized Return If Flat (12%, for example, if you are targeting 1%/month) and then it shows you all matching covered calls and sorts them by Downside Protection. If you have a ‘return goal’ then this is quite the time saver to help you identify possible trades.
Here are some potential 1%/month (or better) ETF trades that the tool found for the Oct 22 expiration date:
Each of those ETFs would have to fall by the amount of downside protection listed before you would lose money. And if they stay above their deep-in-the-money-strike prices by Oct 22nd then you will make a minimum of 1%/month. Note that many of them have already come down quite a bit in the last couple of months. While they could fall an additional 16% (or more) in the next 30 days, it seems like a reasonable risk to take (and 1%/month beats the interest you’ll get on cash or bonds right now).
