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Covered Calls: How-To

We got a ton of questions today about covered calls, how to enter them, what our numbers mean, etc. We wanted to make sure everyone was on the same page!

When we refer to entering a covered call, we mean buying stock and also selling a call at the same time. Sometimes we refer to "selling" a covered call, but here we are referring to the same thing: buying the stock and selling the call option at the same time.

One covered call is: 100 shares of stock and one short call option.

On E-Trade and Schwab, which we use, this is called a "Buy-Write" and it makes it super easy.

Covered calls are entered for a "net debit," which means you pay to enter the position. The amount is the current stock price minus the premium. You always want the entry price to be less than the strike price of the option.

So, when we said earlier today to enter AMC $6.5 F26 covered calls for $6.45, that means you pay a net debit of $6.45 to buy 100 shares of AMC and sell one $6.5 F26 call. The broker figures out the difference for us when we do the buy-write.

Note: the max profit here is only $0.05, since the total price at expiration, when the call option is worth $0 is the $6.50 strike. That might not sound like a lot. It's only 0.77%. But since we make that 0.77% in just three days, that is a 94% annualized return. Not bad!

To exit the covered call, you do the reverse: you sell the stock and buy back the call. You can enter the GTC exit order by entering the buy-write with the buy/sells flipped so you sell the stock and buy the call for a "net credit" (money received). We provide the net credit exit price in our signals.

Sometimes, we don't set an exit order and we just let the options get exercised so that the stock is called away from us. That saves us the trouble of exiting, and we get the full value of the option (it goes to $0).

We hope this helped and we encourage you to review our How-To, which include screen shots of how to enter and exit covered calls on E-Trade.

Cheers and happy trading!

Marc and Laura


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