Covered Call Walkthrough

This page will walk you step by step on how to write a covered call on an ETF but it can work on regular stocks as well.

Many people know how to trade a stock. You log on to your brokerage account, Enter the Symbol, Enter the number of shares and click BUY (or SELL if selling).

Writing a covered call is almost as easy.

If you already own a stock or ETF and there is an options market for it you can sell calls on that equity anytime. If you do not own the equity then BE VERY CAREFUL because you may end up trading naked options and you could lose a LOT OF MONEY!

If you own an equity, the process for selling a call is simple.

You want to select the OPTIONS section of your broker account. Once there, select SELL TO OPEN or SELL OPEN. Enter the number of contracts you wish to sell. Each contract represents 100 shares so if you own 200 shares of an ETF you can sell 2 contracts.

Note: If you don’t own shares of an equity you can always “instantaneously” do both by doing a BUY-WRITE on an equity or you can first buy the equity then sell the call as separate transactions. See Last example for Buy-Write example.

The next piece of information is the symbol for the time frame you wish to sell the contract. Options expire EVERY THIRD FRIDAY of the month. After entering the symbol for the time period and strike price submit the order and you’re done!

I’ve included two common broker account examples below.

From TDAmeritrade. An example that assumes you own 100 shares of XLE and you’re selling 1 contract for January 2007 (symbol XBTAE). The premium paid to you for selling this contract (call) is $2.35 x 1 contract x 100 (shares) = $235.00

TDAMTD.gif

Here is an example using E-Trade account. This trade assumes you have 1000 shares of XLE and you’re selling 10 contracts for January 2007. The premium (money paid to you) for selling this contract is $2.35 x 10 contracts x 100 shares = $2350.00
etrade.gif

Lastly, Here is an example of doing a simultaneous Buy-Write on a Gold Miners ETF with symbol GDX. In e-trade, you select the OPTIONS tab and select Complex-Buy/Writes as the Order type. You are buying 200 shares of GDX at $37.96 and simultaneously selling two contracts on those shares for November $38 strikes for $1.10.
Buy_Write.jpg

Please note that commissions are charged on these transactions (not shown) but brokers seem to be charging less and less and some now offer commission free trades.

Lastly, this is just a general overview. I highly encourage you to visit the following website and purchase Ronald Groenke’s Cash for Life book which provides an easy to read way of understanding the Covered Call methodology.

You should also take a visit to the Options Industry Council educational website to learn more about options trading.

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