The Covered Call Analyzer
Using the Input Parameters Form
When you open the Analyzer input parameters form the first time, there will be no values in each of the fields. It is suggested that you click on the "Set to Default Values" button to set values for each Parameter. You can then go back an reset any of them to your own value. Your parameters are compared against the stocks and options traded today which have been uploaded to our server. We upload data daily after the close of the markets, usually around 3:45 PM Central time. Those qualifying will be determined and listed on the Results page. You may want to print this page and have it available for review as you input your own parameters or review your results. Try not to be too broad or too tight in your selections. The Analyzer will tell you if your Parameters have produced no qualifying stock/call combinations. In this case, you need to broaden your Parameters. Please be patient as each page is loading. There is a lot of data to be considered and compared against your parameters. There are specific strategies associated with certain Parameters. See our "Strategy and Philosophy" page. We have set the stock price range from $10 to $50, since these prices usually produce the highest percentage returns. Also, since the default money available is $5,000, you cannot 100 shares of stock priced at over $50. But you can set it anywhere from $5 to $100 depending on your money available to purchase each stock.
Quick Topics
money available - input how much cash you can invest in any given company. Since option contracts represent 100 shares, and there will be commissions on the purchase of the underlying stock, the Analyzer will calculate how many shares you can purchase (in 100 share blocks) after the commission is taken into account. Covered calls can be considered with as little as $2,000 or $3,000 to invest, but bear in mind that since stocks must be purchased in blocks of 100, the price of each share becomes a factor. You can't buy 100 shares of Apple Computer with $3,000.
commissions - in today's investing environment, commissions to buy and sell stock vary widely. Deep discount and on-line brokers offer very low commissions. Full service brokers generally have higher commissions. Many commissions are based on a single trade, but some are "in-and-out". Commissions for option trades can be higher than the stock transaction commission. Because of the wide variety of commissions available, you are asked to input both the stock and call commissions in the input form. Sometime there is a per call contract commission. If this is the case put it in the "per contract" field on the form. If you don't know the commissions, ask your broker for a commission schedule. Because commissions can impact returns heavily, it is best to put in (or estimate) the commissions. The Analyzer calculates the returns after commissions for the stock purchase and call sale. A commission is charged if the underlying stock is called. This "second" commission is included in the "return if called" calculations.
share price - select the range for the stock share prices you want to consider. Remember that you have to buy in 100 share blocks. This means that you need at least $3,000 to buy a $30 stock. Some lower priced stocks (the defaults are set at $10 to $50) can provide good returns. These fields will accept stock prices between $5 and $100 and the Analyzer will include them in your Results. Stocks selling for less than $10 tend to be very risky. The Analyzer does not consider any stocks selling for less that $5.00.
PE ratio - price/earnings is a measure of if, and how much, the company is earning. It is calculated by dividing the price of the shares by the annual earnings per share. If a stock price is $20.00 and the annual earnings are $1.00 per share, then the PE Ratio is 20 ($20.00/$1.00). Generally, the lower the PE Ratio the better. The default maximum PE Ratio is set to 20. Many companies, including new and/or high flying ones, do not have any earnings so the PE Ratio is theoretically infinity. This is usually represented in the stock data with letters like "dd" (for deficit) or "N/A". The Analyzer will indicate negative PE Ratios as a blank. The Analyzer allows you to select and analyze companies with high PE Ratios or negative earnings. By clicking on the "Include Stock/Call Combinations with High PE or negative earnings" button on the Results page, you will get another results page which represent all stocks meeting your parameters with the PE ratio parameter ignored.
hi/lo ratio - this is a measure of where the stock price is in relation to its 52-week high and low prices. Many people do not want to consider a stock that is at or near its high price, assuming there is more potential for downside rather than continued upside. It is assumed that a stock with good earnings (see PE Ratio) and a price off its high has more upside potential. The default value for hi/lo ratio is 80%. This means if the 52-week high was $20 and the 52-week low was $10, the current price should not be over $18. If the current price is half way between the 52-week high and low, the hi/lo ratio would be 50%. If you get a number over 100% or a negative number, it means that today's stock price is at a new high or a new low.
expiration month - expiration occurs on the third Saturday of the month (but individual traders must exercise on or before the Friday third Saturday of the month). This field defaults to the next month expiration date beginning ten days before this month's expiration. The last week before expiration does not have very good premiums. In fact, even two weeks before expiration you can see premiums begin to decay. If you do not get good results for the default month, you may want to set the expiration month to the next month and then rerun the Analyzer. You can change the month by using the pull-down list box. The best returns are generally realized for calls sold for expirations one or two months out (30-60 days). Another factor is that your money is not tied up (in call contracts) for too long a time.
spread - the difference between the current share price and the strike price. Using a value greater than $5 (or $2.50 for lower priced shares) will put you into second out-of-the-money strike prices. Usually values between $.20 and $1.00 are reasonable for the next out-of-the-money strike price and provide for some good appreciation before the stock is called. The default is set to $0.50.
option price - the minimum amount you want to receive per share as an option premium. You should be looking for option prices that are fairly high. Selling 3 contracts at $0.12 ($.12 x 300 =$36.00) may not produce enough to offset the commission charges. The sale of the call contracts is money in your pocket so look for the good premiums. The default is set to $0.50.
daily option volume - how many call contracts traded today. Similar to open interest, you want the call options to have some daily interest. Default is set to 50.
open interest - represents how many call contracts are outstanding. You should set this parameter to 100 or greater. This means that there is an interest in these options and that there is a market for them. Popular stocks have option open interest in the thousands. The Analyzer eliminates contracts with open interest less than 5 contracts. Default is set to 500.
return if called - This is where you get to the real purpose of using the Analyzer. Your objective is to maximize your return on these transactions. This parameter represents the annualized return that you want to receive. The return represents both the appreciation of the stock price to the strike price and the call premium. It takes into consideration the commissions and the number of days to expiration. The result is an annualized return. Some calculations by other services will give you a total return which does not consider the time element. For example a stock/covered call combination yielding a straight return of 10% over two months is not as good as a straight return of 6% over one month. Because of this, the Analyzer calculates the annualized return for each qualifying stock/covered call combination. It is not unusual to see annualized returns if called of over 100%. The default is set to 30%.
return if same - this is also an annualized calculation. It represents the percentage annualized return if the stock is not called and the share price, at expiration, is the same as the purchase price. This value represents the premium received from the sale of the calls. If the stock is not called and the stock price is near the original purchase price, you should consider selling calls again for the next month. The default is set to 20%. We generally indicate the actual return (in % but not time sensitive) for each transaction in our Results pages.
You can return to the default values any time by clicking:
When you are ready to input your Parameters for analysis click:
It will take some time to perform the analysis on all the stocks and find those that qualify to your parameters. Please be patient.
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