I am currently holding a few growth stocks such as Palantir, Nio, Pinterest and their share prices are more volatile as compared to mega-caps such as Microsoft, Apple or Alphabet (Google).
Why Weekly Covered Call?
For these stocks which I own 100 shares or more, I sold weekly covered calls instead of monthly covered calls as it is easier to keep track of their share prices this way instead of losing sight of them and missing out on their share price spiking up.
The risk when the share price spikes up is that the covered call contract will be more likely to get exercised, which means you have to sell your shares at the strike price (agreed price to sell). If the strike price is lower than your breakeven price, then you make a loss.
If you should decide that you do not want to sell the shares and instead choose to buy back the covered call contract, then the premium will increase significantly and be higher than what you have received when you opened the contract.
The Psychology Of Time
When you have a one-month contract expiry instead of a one-week contract expiry, you may not want to close the contract so soon, hoping there could be a reversal to the trend that is working against you.
However, if the stock continues the trend with no reversal, then the loss will be greater as compared to if you have closed it sooner. I have lost money on occasions where the stock was going sideways for a few weeks only to spike up nearer the expiration date.
Why The Need To Monitor?
In a typical covered call contract, if the strike price is the share price you are willing to sell, there is actually no need to monitor the share price. If the share price closes lower than the strike price on expiration, you keep your shares and premium.
If the share price closes higher than the strike price, you sell your shares and earn a profit off them. You then have the capital to continue the Wheel strategy by selling a cash-secured put contract.
However, if the share price of your stock has fallen significantly, lower than your average (break-even) price, and you are selling covered call to earn some returns while waiting for the share price to recover, and your strike price is below the price you are willing to sell, then it is critical to monitor the share price so that you do not have to be forced to sell your shares at a loss.
Example: You own 100 Apple shares at an average of $200. However, Apple is currently trading at $150. You decide to sell a covered call contract expiring in 30 days with a strike price of $160. It is critical to make sure the contract does not get exercised or you will end up losing $4000 for selling your Apple shares.
ITM, ATM or OTM?
The premium received from selling covered call increases from OTM (least) to ATM to ITM (most). However, the probability of getting assigned also increases from OTM (least) to ATM to ITM (most).
As an option contract seller, you would usually not want your contract to get assigned/ exercised. Because you can keep repeating the whole process, contract after contract, and keep collecting premium, while you keep your shares for the long term.
I personally like to sell ATM or slightly OTM-covered calls as this offers the best risk to reward ratio. ITM may give a higher premium but eventually, you are selling your shares at a lower price if the contract gets assigned. Deep OTM covered call gives a very low premium which is not worth it, unless the strike price gives you very good profits if you have to sell when the contract gets assigned. Having said that, the good thing about deep OTM calls is the chance of being assigned will become lower.
<< Subscribe to my blog to have all these articles delivered directly to your email address >>
*** FREE MONEY ***
Sign up for WeBull Securities Brokerage and fund any amount to receive up to USD500 in share value (Apple, Tesla, Microsoft, Google)
Receive Free Money (USD30~USD500) When You Sign Up With WeBull Securities Platform (Fund ANY Amount)
*** FREE RESOURCES ***
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading
After accumulating more than 600k of unrealized losses on my portfolio, I wrote this article to encourage friends and investors who are also losing a lot of money to the market.
If You Are Feeling Depressed From Losing Lots Of Money In The Stock Market, Here’s An Article For You
In the 10 years of my investing journey, I have made many mistakes but also learned many lessons from these mistakes. I compiled the 10 most valuable lessons that I have learned and may they help you succeed in your investing journey.
Happy 10 Years Of Investing | 348k (Realised) Profit, 635k (Unrealized) Loss & 10 Lessons Learnt
The precious 6 lessons I learnt after cutting more than half a million of losses in the stock market through bad investments and risky trades.
6 Lessons Learnt After Losing 551k In 10 Years Of Investing & Options Trading | What Newbies Should Know They Start Investing/ Trading
How I managed to build a 1M investment/ trading portfolio despite coming from humble beginnings.
How A Poor Kid Got To A 1M Investment Portfolio | Tips & Principles Of Building Wealth
I did these 10 side hustles while holding a full-time job, so I share them here so you can be inspired to grow your wealth through a side hustle that you enjoy.
I Did These 10 Side Hustles While Working Full Time | 10 Side Hustle Ideas To Help You Earn An Extra Income
Struggling with inflation and high cost of living? Try these 10 methods to help you save money and accumulate more savings for investments or rainy days.
10 Ways To Save Money To Help You Fight Inflation & Rising Costs Of Living
Why I am building $120,000 of cash reserves in Singapore Savings Bonds (SSB) & 5 reasons why I think SSB is a worthy low or zero risk investment that you can consider.
Why I Am Building $120,000 Of Cash Reserves In Singapore Savings Bonds (SSB)? | 5 Reasons Why SSB Is A Worthy Low Risk Investment
Sharing why I am doing Dollar Cost Average (DCA) into SPY and QQQ ETF for long term investments and a step-by-step guide to doing it automatically with Interactive Brokers.
Why I Am Doing DCA (Automatically) For SPY & QQQ For My Long Term Investment? (20% ~ 30% Upside Potential) | Step By Step Guide To Activating Automatic Recurring Investment On IBKR
*** FREE MOTIVATIONAL BOOK ***
If earning more money from your investment does not excite you anymore, you may be seeking a purpose that brings fulfillment and meaning in life. I have written a motivational book that may be useful to you in some ways. You can also download a free copy here:
https://learninginvestmentwithjasoncai.com/finding-the-magical-realm-of-happiness-motivational-book
Learning Investment With Jason Cai 
Thanks for the sharing. I had tried selling deep OTM calls/puts and while the chances of not hitting the strike price is higher, I realized that the potential profit that you get when closing the contract before expiration appears to be lower even though the existing share price is still OTM. Similarly, if the share price rises and goes close to your strike price but still OTM, it may sometimes be a loss if you decide to close the option. Not sure if you encounter this? Thanks.
LikeLike
Thanks for dropping by! Usually, if the share price rises above the price when we first sold a call, it will result in a loss when closing the contract, regardless of whether OTM or ITM. As CALL options seller, we will gain when the share price drops or stay sideways. Unless it is on the last day whereby the premium will drop significantly if the share price is still nowhere near the SP. So, it is always a challenge to find a good return yet not allow the contract to get exercised with a lower SP,
LikeLike
Agree. Thanks for the quick reply!
LikeLike