From Theory to Practice

Juicy Covered Calls

| May 17, 2016
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    From Theory to Practice

    Juicy Covered Calls

    May 17, 2016

    The covered call, in its traditional, standard format, is difficult to improve upon due to the fact that it is so effective in its current form. But, given the fact that we are in a period of extremely low volatility, and we’re all looking for something to do, we offer up an innovative way to juice up the plain vanilla covered call.

    A juicy covered call involves a current long stock position plus a call ratio. In other words, you add a long call (usually ATM or slightly OTM) and two short calls (usually around the 30 or 35 delta) to your long stock position. Another way to think of this position is as a standard covered call plus a long call spread. What we find is that this strategy outperforms a standard covered call if we are correct in our bullish assumption, and the underlying rises up, or beyond, our short strike. The standard covered call is the more effective strategy if we are not directionally right, and the underlying moves lower or goes nowhere.

    In conclusion, the standard covered call is the more conservative strategy that continues to show impressive results. However, the juicy covered call offers you an opportunity to generate a higher P/L if you have a convicted bullish assumption, and you are correct.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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