The
Covered Call Analyzer
Strategy & Philosophy
(well worth reading)
This page provides some guidelines and strategies for running the Analyzer and making money with covered calls. Your objective in using this site should be to identify those stock/call combinations that will yield the best return. We assume that call premiums are run up by "people in the know", that have done their own analysis and determined that a stock is going to rise. The Analyzer finds these combinations. We use the Analyzer to identify opportunities for our various "Stocks-to-Consider" lists and monitored portfolios published each month on expiration weekend for our subscribers.
Quick Topics
| Additional Data Provided | ||
Data will be uploaded after the close of each trading day (usually at about 4:10 PM Central time). The data may include after-hours trading depending on the time of the upload.
Please be patient while the different data pages of this site are being loaded. There are thousands of combinations that have to be evaluated against your parameters and this can take some time, depending on the speed of your computer and your Internet connection.
The Analyzer can be run at any time. Since data is uploaded after the close of each trading day, it is assumed that subscribers will run the Analyzer in the evening, determine their selections and make trades early the next morning. We run the Analyzer once a month on expiration weekend. Thirty years of experience have taught us that the best call premiums, producing the best annualized returns, are realized one expiration period before the next expiration. This is why we run the Analyzer and publish our "Stocks to Consider" lists and our monitored portfolios only on expiration weekend. This also allows our subscribers to review our lists and portfolios, use their own parameters during the weekend and then make their trades early Monday morning.
Your objective in Establishing Parameters is to limit the analysis of many stock/covered call combinations to a manageable few that have a good chance of producing your desired returns. You set your own parameters on the first (input) page when you run the Analyzer. If you are not sure just what the parameters are, click on "how to use this form" at the top of the Input page. Defaults for all parameters can be set by clicking the default button. Your parameters will be saved once input by you and shown when your return to the Analyzer. Parameters include:
Cash available to spend on a single stock purchase. The Analyzer will insure that your purchase will not go over this amount including commission.
Commissions you will pay (ask your broker for a commission schedule - your input commissions are included in the calculations and can have a major impact on the annualized returns. Some brokers have a base commission only; others have a base plus a commission per contract. The Analyzer allows for this)
Range for the share price (default is set between $10 and $25). The Analyzer does not consider stock prices less than $5.00 or greater than $35.00.
PE Ratio maximum (default is set at 70)
High/Low ratio (where is the current stock price in relation to the 52-week high and low price - default is 70%)
Spread (difference between the current price and the strike price- default is set to $0.25)
Option minimum price (default is set at $0.25)
Option minimum open interest (default is set at 100 contracts)
Option minimum volume (for the day - default is set at 20)
Minimum desired annualized return if the stock is called (default is set at 20%)
Minimum desired annualized return if the stock price remains the same (default is set at 15%)
The Analyzer selects those stock/call combinations that meet your parameters, calculates how many shares (in blocks of 100) you can buy with the money available (less commissions), provides the stock and call symbols and determines the annualized return if the stock is called or if the stock price is the same at expiration. Results are ranked by the return if the stock is called.
The Analyzer produces pages that contain the following information to help in qualifying stock/call combinations:
Company Name
Stock Symbol
Last stock price
Number of shares to buy
Option Symbol
Expiration date
Call bid price
Number of contracts to sell
Cost (how much money available is actually required to purchase the stock in blocks of 100 including commission)
Income (how much will you put in your pocket from the sale of the calls less commission)
Breakeven (how low can the stock price go before it offsets the income)
Downside (percentage to breakeven)
Return if Called (annualized return, in percent, if the stock is called away - includes sale of called stock commission)
Return if Same (annualized return, in percent, at expiration, if the stock price is the same as when you bought it - there is no sale of stock commission if you don't get called.)
additional information needed to evaluate the stock/call combination (see below)
Why use annualized returns? Annualized returns are used rather than a "straight" return because options are time sensitive. For example, compare the following (ignoring commission effects):
500 shares of XYZ Co purchased at $10 each = $5000 (cost);
sell 5 call contracts at $1.00 for $500 (income) expiring in 30 days;
straight return is 10% (income/cost)
annualized return is 120% (income/cost x 12 months);
If you sell 5 call contracts at $1.50 for $750 (income) expiring in 60 days
straight return is 15% (income/cost)
annualized return is only 90% (income/cost x 6 each 60 day periods in a year)
The straight return looks better but it was realized over a longer period of time and your investment is tied up for an additional 30 days. Generally, next month options (either 28 or 35 days from the previous expiration date) produce the better returns. The Analyzer, by calculating annualized returns, determines which of all the stock/call combinations meet your parameters and have the best annualized return. Our results (after the fact) provide "straight" or actual returns, regardless of time, in both dollar and percentage returns.
Stocks with prices below $5.00 and greater than $35.00 are not considered. The Analyzer uses the last "ask" price for the stock in the calculations. This is because it represents what someone actually was willing to pay to purchase the stock near the close. Last "bid" and "ask" prices for the stock are shown in the data provided for qualifying combinations. This is so you can make a comparison of the last trade to the last bid and ask prices. Bid and ask prices are only shown for NASDAQ stocks.
The Analyzer provides data only for the next two out-of-the-money strikes greater than the current share price for the next month.
The call contract last "bid" price is used in the calculations. Sometimes option contracts are traded early in the day and the last trade price does not represent what the stock price has done during the rest of the day (especially if the stock price has gone down). The bid price usually represents what someone was willing to pay for the call contract at the close or near the close, and may be more indicative of what you will receive when you sell the calls. The "ask" and "last" call prices are provided in the "Consider" pages for comparison.
PE Ratio is the price of the stock divided by the earnings per share. If a stock has a price of $50.00 and earnings per share of $1.00, the PE Ratio is 50 ($50/$1). It is considered to be a good measure of the quality of a company. Low PEs are good. Theoretically, companies with no earnings have a PE Ratio of infinity. Sometimes companies with losses (negative earnings) will show their PE Ratio as a negative. If you select a maximum PE Ratio in your parameters, companies with negative earnings will not be included in the results. It is recognized that some small and new companies have not had a chance to produce a positive PE ratio yet, but they are growing and call options on their stock can be attractive. It is possible to analyze stocks with high PE or negative earnings by clicking on "List Stock/Call Combinations with hi PE or negative earnings" on the first "Results" page.
You should always establish a get-out price and stick to it. This is the hardest thing for investors to do. There is that hope that "it's gone down so much, it has to come back (sometime)". We have established our get-out price at -15% of the purchase price and we stick to it. In order to get out, you must first sell the call contracts (usually at a much lower price than at which they were purchased) and then sell the stock. If the Analyzer finds a stock that is anticipating "news", such as a biotech or drug company awaiting approval from the FDA, we may identify it as "RISKY" in our lists and portfolios. This usually occurs in our aggressive lists and portfolios and investors should be prepared for a big reward or a big loss. Sometimes there is a stock that "tanks" so fast on bad news that it is impossible to get out at the get-out price. This happens rarely, but when it does, we hold the stock until the next expiration, since it may be difficult and pricy to buy back the call contracts and we are looking for a bounce of a few percent in the time following the "tank".
Time is a wasting Asset. As the expiration date draws near, call prices will drop if the stock has not moved much. As a result, if you run the Analyzer close to expiration, and look for stock/option combinations that will expire within the next few days, there will generally be less to chose from. As time progresses towards the expiration date, less and less stocks have premiums that justify the high returns that are anticipated. Better to check out the next month. We set the "default" expiration month in the Analyzer to the next month ten days before the expiration for the current month.
The Analyzer is not intended for use by the day trader; it is intended to help individual investors find opportunities in the market. The market changes rapidly and only online traders can make trades that catch instantaneous opportunities. Generally, stocks and call options move up or down in tandem, so an opportunity should still produce good returns if the trades are made early the next trading day. You will probably notice that if you use the Analyzer daily, there are certain combinations that are on your list for several days. They should get special attention.
The individual investor should look at and consider the additional data provided by the Analyzer. Exceptionally good annualized returns (300%+) should be looked at with skepticism. They usually result from some aberration in the market - a single trade for an out of line price in small volume can skew the results dramatically. Rapid price dips in the stock price can indicate the same high returns. Splits can create problems with the data. It usually takes a few days for some data to catch up with splits. It is always best to double check data, especially if it looks suspect (too good to be true). Use the "Chart/Data" feature on our "Consider" pages to go to the Yahoo Finance pages to check data and for splits and news.
The Analyzer provides other important data about the stock/call combination that should be looked at carefully before committing funds. This data is presented with each qualifying combination and includes the following:
Percentage change in closing stock price from yesterday closing price
PE Ratio
High/Low ratio
52-week High
52-week Low
Earnings estimate for next fiscal year (use cautiously)
Stock volume for the day
Call last trade price
Call closing ask price
Call contract open interest
Call contract volume for the day (not included in the open interest)
Days to expiration
Prices can vary from what you will see in the Analyzer and certain other pricing services on the Internet. The Analyzer data is from the close of equity markets each trading day and these are the prices you will generally see in the financial papers the next day. Variations can occur because some services include after hours trading, or do not update their data until several hours after the close.
The
developers of the Covered Call
Analyzer have spent over thirty (30) years developing a basic strategy
for maximizing the use of covered call options. This strategy has allowed the development of wealth in various kinds of
accounts including IRA accounts. Several people have used the strategy to retire
early and to provide ongoing retirement income.
The
strategy is relatively simple, requiring no graphs, charts or Greek letter
formulae. Instead it uses time tested trial, error and results to produce a set of rules to enhance portfolio value.
We have been publishing our results since 1999 and have modified our strategy as
we have identified new ways to use the Analyzer. A review of our "Results" pages
for our initial "Stocks to Consider" Lists indicated a few "not-so-good"
strategies that have been modified as the markets have changed (volatility for
example) over the last few years. We have probably experienced every covered
call possibility over the years and our "Result" pages show you what we did
in every transaction in the "Comments" field for each stock/call traded.
top
The suggested strategy is as follows:
1. This is an ideal strategy for a self-directed IRA account, but will work well in any account. If you are young and building your portfolio for retirement, retain everything in your account - growth in stock share price and all premiums from the sale of calls. If you are retired, use the call premiums for income and retain the stock and the appreciation of the stock as it moves up to the strike prices in the portfolio. When a stock is called or sold, keep this money in the account and use it to buy another covered call stock opportunity identified with the Analyzer. Consider selling next month calls on stocks that were not called if they are favorable. If not, consider selling or holding the stock, depending on its fundamentals.
2. Review your portfolio and run the Analyzer on the weekend of (or the Monday following) the third Friday of each month. Calls expire on Saturday of this weekend and a new cycle for the selling of calls starts on the following Monday. On this Monday, there will be a market for calls for the next two months on all optionable stocks. You can run the program on the weekend following the third Friday, but there may not be options listed for some stocks for the second month out, depending on which cycle they are in. There will be prices for call options for all optionalble stocks for the next expiration date on this expiration weekend. Starting prices for all two month out options should be generated on Monday.
3. Don’t put all your eggs in one basket. Divide you investing money among several different stocks, in different industries, in different price ranges. Because commission effects can be so large on smaller transactions, you might be tempted to put everything into one stock that has a high return. Don’t! The Analyzer will tell you how many shares to purchase with the money you have, after the commission effect. Use this feature. A rule of thumb would be:
|
Total Money in Portfolio |
How many stocks to by |
Put in "Money Available" Field |
|
$10,000 |
2-3 |
$3,500 |
|
$20,000 |
4-6 |
$4,400 |
|
$50,000 |
6-10 |
$5,800 |
|
$100,000 |
8-14 |
$10,000 |
and so on.
Diversification is good; the more stocks
you can have in your portfolio the better, but you must have at least 100 shares
of a stock in order to sell a call contract. It is hard to make good returns in
a covered call portfolio with less than $10,000, but it can be done. As your portfolio grows, raise the amount you put into each stock.
Be patient.
4. Use the Parameters to select your stock. These are simple basic measures of how a stock is performing. You can establish your own parameters for the stock’s P/E Ratio, 52-week price range, spread between share price and strike price, desired return if the stock price stays the same and desired return if the stock is called away. The Analyzer performs calculations on all the stock/call combinations traded that day that meet your parameters, tells you what and how many shares to buy, what the cost will be after commissions, what covered calls and how many to sell, the income realized from the sale of the call contracts, and projects annualized returns if the stock stays the same or is called.
5. Don’t go for low priced stocks. Many stocks priced in the $5 to $15 range have spectacular option premiums. Volatility is a measure of how fast and how much a stock’s share price goes up and down. High volatility means the price fluctuates widely and quickly. Stocks with high volatility usually have higher call premiums and may predict some spectacular returns. You should not buy stocks just to sell covered calls that will have big annualized returns. You may buy a stock, sell some calls and realize a big net income from those sales, only to see the stock share price drop sharply during the term of the option because some anticipated event didn’t occur. Select stocks on their merit and not on their volatility. The parameters section of the Analyzer allows you to establish conservative criteria when selecting stocks.
7. The strategy doesn’t rely on charts, graphs or formulae using Greek letters. The strategy does assume that the market establishes good market value (premiums) for good stocks or stocks that are predicted to do well in the next few months. Professionals who study the many companies that have call options and insiders, set the premium for calls by offering to buy them. The algorithms used by the Analyzer finds these stock/call combinations. This strategy helps you select stocks that should do well based on the premiums established by professionals in the market.
8. Consider only the sale of “close in” calls - those for next month. Time is a “wasting” asset and options with expiration dates about 30 days out, generally tend to have good premiums. Also, you don’t want to be sitting around for months (or years) with your primary assets (stocks) tied up in an options contract. The Analyzer sets the default month to the next month. Although the Analyzer can be run at any time to select stock/call combinations, it is recommended that the Analyzer be run on expiration weekend or the Monday following expiration weekend (see above).
9. Sell the next out-of- the-money call, that is the strike price that is the next $5.00 (or $2.50 for low priced stocks) increment above the current share price.
10. Don’t roll up your calls. If the stock goes above the strike price, you may be tempted to buy back the call (at a much higher premium) and sell the next higher strike price covered calls. This may be tempting because you can keep the stock and keep riding it up. This usually doesn’t work. If the stock goes above the strike price let it get called. Take your profit and run. If you still like the stock, and running the Analyzer indicates it is still a good covered call opportunity, buy some more of the same stock and sell more calls.
11.
Don’t roll down your calls. You should have a "get-out" price
for the stocks that you buy, generally about 15% below the purchase price
If the share price drops to this level, get out. Don’t hope that it
is coming back.
Take your loss and move on to something else.
Remember that you must buy back the calls (at a lower price) before
selling the stock. If
the share price drops, don’t hold and sell new covered calls the next month at
a lower strike price.
This only locks in a loss.
Set your lower limit and get out if you reach it.
12. Don’t get greedy. Maintain a long term outlook.
13.
Use data to make your buy decisions.
Outlandish returns. Sometimes the top annualized return if called can be greater than 500%, sometimes greater than 1000%. There is usually an aberration when this happens - a stock split, a few small trades made at very high prices, etc.
Better returns generally occur with lower priced stocks - but low priced stocks can be risky.
How much income will you receive? You can usually realize larger incomes by setting the minimum call price at a high value (the default is $0.25. It is usually good practice to set the minimum call price and the spread at about the same value. This means that for out-of-the money calls, the income and stock appreciation should be about the same. Sometimes you will see large returns if called, but the stock will have to rise a lot to get called and realize the gain.
Look for high returns if the stock price stays the same, as well as high returns if the stock is called.
Check to see if the bid, asked and last prices for the call contract seem reasonable. Big differences usually mean rapid movement in price.
Be cautious when considering stock/call combinations for companies with negative earnings. Some companies are growing and have good call potential. Pick these combinations by checking other data/information about the company. The Analyzer provides a link to the Yahoo finance page on some pages. Use this link to get additional information about the company before investing. Note that prices may vary between the Analyzer and the Yahoo data because Yahoo may include after hours trading data. Yahoo offers a very comprehensive charts and options section at their site. Use this data.
Where in the 52-week high/low ratio is the stock currently trading? It is usually not good practice to consider stocks that are at or very near their all time high. If the value is a negative, the stock has hit a new low that day. If the value is over 100%, the stock hit a new high that day.
Check the volumes for the stock and call contracts for the day. High volume usually implies interest.
The percent change in the share price indicates if the stock price went up (+) or down (-) today. It's usually best to consider stocks that are coming off their lows (high/low ratio) and are starting to move up.
Assume the market knows more than you do. The market establishes prices for stocks and options. If they are high and moving higher, the market is indicating what most people (and those with the most money) think.
Earnings Estimates may sometimes be suspect. They represent what a group of professional analysts think the company will do next year. Sometimes the "group" is only one person. If the company is small and unfamiliar to you, do some checking before committing funds.
We have tried to make sure that the stock symbol, option symbol and company name are correct. We are using the CBOE master list, which is probably the best available. However sometimes duplicate name are used on this list, producing two sets of data for the same company. For example COMS is identified on the list as both Three Comm Corp and 3 Comm Corp.
Investment Enhancing Systems, Inc. provides the Analyzer as a calculation tool to help the individual investor identify those stock/call combinations that will yield superior returns . It is up to the individual investor to perform due diligence on any investment strategy before completing any transaction and monitor performance on any investment.
Good Luck and Profitable Investing!!!
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