7 Tips for Successful Covered Call Writing

Writing covered calls is a strategy used by investors to ensure that they make a profit from selling their stocks at an unlikely strike price. When you write a covered call, you are selling someone the option to purchase your stocks at a specified price within a specific time frame.

If you want to succeed at covered call writing, we have 7 essential tips you should learn.

1. Know the basics of covered call writing.

Writing a covered call means you sell the option to another investor to purchase your stock at the assigned strike price within a certain time. An investor can get this option at a set premium price.

Lyons Enhanced Yield
Investment Strategy   

Register for more information and to subscribe to Lyons Wealth Monthly Newsletter to get investment insights for buying and selling covered calls and Forward Thinking • Investment Strategies that generate cash.
For Investors with a minimum of $100K
Please choose a value.

Here are a couple of things to know:

  • You need to have 100 shares to be able to write a covered call.
  • The strike price should be higher than the market price.
  • The premium price should only be a fraction of the market price.
  • You must follow through with the terms according to the agreed-upon expiration date.

For example, you have 10o QRS stocks. The market value of these stocks is $100 per stock. You can write a covered call that gives the buyer the option to purchase your stocks, with a premium of $2 per stock within 30 days.

Let's say you set the strike price at $105. If your stock rises to $105 within 30 days and the buyer decides to purchase them, you have no choice but to sell. However, if the stock remains at market value and the buyer doesn't want to purchase them, you still would have earned $2,000 as your premium income.

2. Assign an appropriate premium price.

The premium is the price someone can purchase the option to buy your stocks. Generally, investors advise setting 2% of the stock price as the right amount for the premium. Let's say the stock is priced at $100. The appropriate premium price is $2. Going above this requires research and calculated guesses. If the marketplace shows that the performance of your stocks is doing well in terms of value and demand, you can definitely increase your premium.

Always remember that this is one of the main reasons people use the covered call strategy. This is a surefire way to earn from your stocks. When you sell the option to other investors to purchase at certain stock prices, you are already earning at least 2% of the current market price of your stock.

It may not be a lot, but it's 2% more than what you had this morning. Whether your shares perform well or you need to sell stock eventually, you will have a small amount of downside protection.

Set an appetizing strike price.

When you decide to write a covered call, you need to set a strike price. When the stock rises and hits the assigned strike price, the buyer has the right to purchase your stocks at that price. Picture this: your stocks are at $100 selling price at present. You sell covered calls at a $2 premium, so the buyer can get your stocks at a $105 strike price, within 30 days of purchase.

A good covered call writer will set a desirable strike price that will seem attainable to the potential buyers of the call option. Buyers need to see that the covered calls are good deals. Based on market conditions and trends, you will most likely find the best strike price to assign.

In our example, setting $105 as the strike price is a good idea only if the market predicts stagnant performance within the assigned expiration date.

4. Use covered calls to enhance the overall return on your stock position.

Writing and selling covered calls is a great way to cover the upside risk of your stock's call options. When you don't consider writing a covered call, your stock has an endless loss potential. Selling calls is a solid investment strategy that allows you to collect the option premium, which gives you added downside risk protection.

Writing calls also reduces the cost basis of your stock. Let's say you have 100 shares of XYZ stock with the purchase price of $70 per share. Your covered call buyer can opt to buy your stock at the strike price of $85. They will purchase this premium at $2.50 per share, which totals $250. It automatically decreases your stock cost basis to $77.50 per share.

5. Take advantage of the bullish market.

Before you decide writing covered calls is the best way to maximize profits, you will need to study market volatility and trends. When you discover that your stocks are swimming in a bullish market, meaning the stock price rises constantly, you can take advantage of this.

So, if you're in a bullish market, and you decide to write a covered call, you are automatically assuming you are going to sell. This means you can increase the call premium a little more. If you would normally set the premium at 2% of the market value, you can go as far as 4-5%, depending on how the stock performs. This way, you can generate income and boost returns as much as possible.

6. Be prepared to lose the stocks bound to the covered call.

When you write a covered call, you have to accept that there is a chance you will lose these stocks. If you have shares that you're emotionally tied to, it may not be a good idea to write a call option for those.

You are also letting go of the potential profit these stocks may bring, in case they perform well in the future. Some stocks may be stagnant for long periods of time, but you will never know what can change in the market. If the stock performs better after a few months, you are also losing that opportunity for increased profit.

7. You should be willing to own the underlying stock.

So, let's say you decide to write a call option for your stock. You may have discovered that this is the best way to manage risk and maximize profit potential. You may have even seen promising trends in the market regarding the performance of the stock. The best case scenario is the stock hits the strike price, and you can sell at that value, plus the premium you got for selling the call option.

However, when the stock declines, you have to be willing to stick with it even if it crashes below breakeven point. So, make sure to invest in good quality shares that you can rely on even when the market gets unstable.

Lyons Fundamental Small Cap Value Strategy

Are you missing out on this market rally? Wall Street has seen a surge in small-cap stocks lately, with the Russell 2000 index climbing over 10.7% in the past month versus 5.5% gains in the S&P 500 and 6.1% uptick in the Nasdaq Composite. This rally coincides with cooling inflation data and hopes for Fed rate cuts in 2024.
We utilize our Fundamental Process, including our proprietary GRAPES valuation model, to screen the universe of mid, small and micro-cap companies, use the link below for more information.

Lyons Small Cap Value Fund >>

Our Award Winning Investment Strategies

Lyons Enhanced Yield

Delivering consistent, reliable cash flow, Each position is fully hedged to control downside exposure, Portfolio net yield target of 12-15% annually, Fully liquid No lockup period, no capital calls

View Strategy >>
Lyons Tactical Allocation Portfolio (SMA)

Greater long-term upside capture through sustained full market participation and full equity allocations to multi-year, continuous time periods

View Strategy >>
Catalyst/Lyons Tactical Allocation (Mutual Fund)

The Fund’s objective is to seek total return from long-term capital appreciation.

View Strategy >>
Lyons Fundamental Small Cap Value Strategy

Targets long term growth of capital through buying undervalued small and mid cap companies with improving business prospects.

View Strategy >>
Lyons Core Portfolio

Investing in income generating common and preferred stocks and corporate bonds with long-term holding periods intended to optimize tax efficiency

View Strategy >>
Own a Large Stock Position

Did your advisor say sell and diversify? Keep your stock with Lyons Income Overlay. You don't have to diversify with our cusotmized solution for large concentrated stocks.

View Strategy >>
Lyons CoinDesk Large Cap Select Index SMA

CoinDesk Large Cap Select Index (DLCS), designed to measure the market capitalization weighted performance of some of the largest and most liquid digital assets that meet pre-defined trading and custody requirements.

View Strategy >>

DISCLOSURE ¹ This statement applies generally to initial purchases of a position. Additional shares of a particular stock purchased at subsequent quarterly rebalances may still remain in short-term holding status (owned for less than one year) at the time of this publication. Broadridge MarketPlace is an investment manager database that serves as an objective, third-party supplier of information. Broadridge MarketPlace's Best Money Manager ranking is a comprehensive survey of institutional money manager performance. To be eligible for recognition as a Broadridge Best Money Manager, performance must be calculated on an asset size, which is at least $10 million in size for traditional US asset classes or $1 million for international and alternative investments. Classifications must fall into one of the categories that Lipper ranks (minimum of 20 contenders). All performance data must be calculated net of all fees. For additional information regarding the criteria used by Broadridge MarketPlace, see Minimum Criteria for Inclusion in Best Money Managers listed in the Disclosure of Lyons Wealth’s separate Lipper ranking history document. This material is for the exclusive use of the person to whom it has been delivered, is confidential, and may not be copied, distributed, or otherwise given or disclosed to any person other than your authorized representatives. This material was prepared exclusively for information and discussion purposes and to indicate preliminarily the feasibility of a possible investment opportunity. This material is not meant to be nor shall it be construed as an attempt to define all terms and conditions of any transaction or to contain all information that is or may be material to an investor. Lyons Wealth Management, LLC is not soliciting any action based upon this material, and this material is not meant to be nor shall it be construed as an offer or solicitation of an offer for the purchase or sale of any security or advisory or other service. Lyons Wealth Management (“LWM”) began formally tracking its portfolio performance as of April 2nd, 2012. Portfolio composite returns are preliminary and are presented on a time-weighted, size-weighted total return basis using monthly portfolio valuations. The composite returns for each LWM portfolio presented herein include all eligible LWM accounts. To be eligible for inclusion in the LWM composite, an account must be fee paying, fully discretionary, and not part of a broker wrap program. New portfolios that are managed to the Tactical Allocation Portfolio investment strategy and meet the composite definition will be added to the composite when fully invested. The composite is not representative of all accounts managed by LWM. All returns are expressed in U.S. Dollars and are presented net of all fees and expenses. The returns reflect the reinvestment of all dividends and interest. The return information presented herein has not been audited or otherwise verified by an independent accounting firm, and past performance of any LWM portfolio does not guarantee future results. No current or prospective client should assume future performance of any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may cause the performance results of your portfolio to differ materially from the reported composite performance. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio. Historical performance results for market indices and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. The information, data, analyses and opinions contained herein (1) may include the confidential and proprietary information of data provider, (2) may include, or be derived from information which cannot be verified by data provider, (3) may not be copied or redistributed,(4) do not constitute investment advice offered by data provider, (5) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (6) are not warranted to be correct, complete or accurate. Except as otherwise required by law, data provider shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. This report is supplemental sales literature.