Here are some steps to consider when selecting stocks for covered calls:
- Choose a stock that you are comfortable holding: When selling covered calls, you are obligated to sell your shares at the strike price if the stock price exceeds it. Therefore, you should select a stock that you would be comfortable owning for the long term.
- Look for stocks with high implied volatility: Implied volatility reflects the market’s expectation of a stock’s future price movements. Stocks with high implied volatility tend to have higher options premiums, which can increase the potential income from selling covered calls.
- Consider stocks with a moderate-to-high dividend yield: Stocks with high dividend yields tend to be more stable and have lower volatility, making them good candidates for covered calls.
- Look for stocks with a good technical and fundamental analysis: It is essential to analyze the technical and fundamental aspects of the stock to ensure that it has a stable price movement. A company with a strong financial position, good earnings, and low debt-to-equity ratio can increase the chances of success when selling covered calls.
- Choose an appropriate strike price: The strike price is the price at which the option can be exercised. A good rule of thumb is to sell options with a strike price that is slightly above the current market price of the stock. This allows you to collect a premium while still leaving room for the stock to appreciate in value.
- Diversify your covered call portfolio: Selling covered calls on multiple stocks can help reduce risk and increase potential returns. This diversification can be achieved by selecting stocks from different sectors and industries.
- Monitor the stock and options regularly: It is essential to monitor the stock price and options premiums regularly to ensure that you are still receiving the desired level of income and that the stock remains a suitable candidate for covered calls. If the stock price moves significantly, it may be necessary to adjust the strike price or sell the stock.