• Skip to primary navigation
  • Skip to main content
Mullooly Asset Management, Inc

Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

  • Services
    • Wealth Management
    • Financial Planning
    • Retirement Planning
    • Investment
    • Estate Planning
  • Our Fees
  • About
  • 732-223-9000
  • Schedule A Meeting

Services

  • Wealth Management
  • Financial Planning
  • Retirement Planning
  • Investment
  • Estate Planning

Quick Links

  • About
  • Our Fees
  • Videos
  • Podcasts
  • Blog

Support

  • Contact
  • Client Login
  • Pay Bill Online
  • Form CRS
  • Our Process
Follow us on Facebook
Follow us on Linkedin
Follow us on Twitter
Watch On Youtube

Let’s talk

Covered Call Writing: Spotting A Good Candidate

April 11, 2009 by Thomas Mullooly

Probably the toughest part of covered call writing is finding the right idea.

And ideas change all the time — as markets change, prices change and the option prices (premiums) also change.

Let’s quickly review what “covered call writing” actually means.

Covered Call Writing (sometimes called “buy writes”) involves the simultaneous purchase of stock AND sale of options.  Remember, any time you sell something, you are bringing money into your account.  So you are BUYING a stock (you are spending money) and also SELLING something at the same time (bringing money in).

If you were to buy 500 shares of XYZ at $50, you would SPEND $25,000.  If you were to buy 500 shares of XYZ and also sell 5 calls with a strike price of $55 (sold at a price of $9), you would only SPEND $20,500.  Put another way, your “net” cost would be $41 (buy the stock at $50, sell the calls for $9).

With me so far? 

Great.  Onward.

Now, whenever we examine any stock, there are three possible outcomes:

  • Stock moves up
  • Stock does nothing
  • Stock goes down

In only one of those scenarios will you make money if you simply buy the stock.  Right?

Now what we have done in this example is this:

  • We lowered our out-of-pocket cost to buy the stock from $50 to $41.
  • We have protected our “downside.”  Yes, the stock trades around $50.  But we are at break-even — even if the stock falls to $41. And the charts will clearly define where we should have a stop order to protect us.
  • Yes, we have limited “upside” — the stock could be taken away from us at $55, but we were paid $9 for that chance. (By the way, if that happens, what is the gain?  Bought at $50, called away (sold) at $55 for a 10% gain, plus you were paid $9 as well.  Sweet.)

When looking for candidates for call writing, here are a few things I try to keep in mind:

Covered call writing works well when the market is confused.  Like now. We have short periods of time where the market runs straight up, and then reverses quickly.  In the big picture, we are still in a negative trend for most major indices, but getting closer and closer to testing resistance lines.  We still do not have confirmation this is a significant turning point, and no clear signals the market is turned a page.

So covered call writing is also an excellent way to get some money into the market, and still protect your downside exposure, or simply just bring in additional money into the account.  It’s a great way to goose the yield on your money as well.

But the main thing to know is that you need individual stocks that are in uptrends.  A few weeks ago, there were only a small handful of stocks in uptrends.  Now there are more.  Here are some stocks that are in uptrends that may make good covered call writing candidates.  These are *NOT* recommendations. Call me and we can walk through what makes sense for your own individual situation.

Again, I am not recommending writing calls for everyone on the following:

IBM, Amazon, Reliance Steel, Imperial Oil, Scotts (Miracle Gro), Apple, EMC, Borg-Warner, AutoNation, Staples, and many more.

We need option papers on file.  And we need to have a thorough discussion so you understand clearly how this works.  I would not write about this if I did not feel comfortable at least discussing the topic with you.

It’s worth a look, don’t you think?

Never miss a post...and we deliver!

newsletter mailman

Get our updates delivered right to your inbox. Sign up today!

Success! Now go and check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Filed Under: Asset Management, Stock Market Comments

About Thomas Mullooly

Thomas Mullooly is owner and founder of Mullooly Asset Management, Inc. In 2002 Tom opened Mullooly Asset Management, a fee-only investment advisory firm. As an investment advisor, and not a broker, Tom works strictly for his clients. With the help of point and figure charting, Tom builds a realistic game plan for clients.

1971 State Route 34, Suite 102
Wall Township, NJ 07719

  • 732-223-9000
732-223-9600
  • support@mullooly.net
  • Services
  • About
  • Our Fees
  • Contact
  • Form CRS
  • Videos
  • Podcasts
  • Blog
  • Client Login
  • Pay Bill Online
  • Our Process

The information on this website and blog do not involve the rendering of personalized investment advice. A professional advisor should be consulted before implementing any of the options presented. None of the content contained in this website should be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

© 2022 Mullooly Asset Management Inc. All Rights Reserved.

  • Privacy
  • Disclosures and Legal Disclaimers
  • Privacy
  • Disclosures and Legal Disclaimers

© 2022 Mullooly Asset Management Inc. All Rights Reserved.