July 14, 2017
3 minutes read
Generating consistent income with covered calls can be achieved when using a disciplined and methodical approach. It’s important to understand your personal preferences before searching for income opportunities on your portfolio. Choosing expirations that suits your trading frequency and strike prices that fit your risk tolerance is critical for consistent results. Lastly, it goes without saying that there needs to be liquidity in those options. For financial advisors executing large orders, checking for liquidity is especially relevant. In this post, we’ll show you how to use OptionsPlay Canada provided by TMX to quickly find covered call income opportunities for your portfolio!
Based on frequency of trading, active investors should choose shorter dated options (3 weeks – 6 weeks), long term investors may opt for longer dated (2-3 months) and swing traders somewhere in between (6 weeks to 2 months). Using OptionsPlay Canada you can choose your preference for short, medium or longer dated options under “Income Settings”.
Our research shows that it’s preferable to sell more shorter dated options in a year rather than fewer longer dated options. This is due to earnings cycles which adds uncertainty for option sellers. Longer dated options have a higher chance of including an earnings release, causing them to be subject to large price movements.
Short Dated: Sell 12 x 1 month Calls = 4 out of 12 = 25% have earnings uncertainty
Long Dated: Sell 4 x 3 month calls = 4 out of 4 = 100% have earnings uncertainty
The easiest way to gain consistency is to use the greek Delta as your method to selecting strike prices. Delta provides an approximation of the probability that the stock will stay below the selected strike price. By using probability to select strike prices, you’ll find better consistency compared to selecting a set percentage above the current price. Use the following graph to understand which Delta is suitable for your risk-tolerance:
Generating income is valuable for any investor by reducing volatility while provide downside protection on a portfolio. It’s important to not only know how to choose the right options, but having the tools to do it. Use OptionsPlay Canada’s Income Settings to quickly find the covered call opportunity that suits your portfolio. Simply choose your desired time-frame and risk-tolerance and instantly see the best income strategy that fits your preferences!