A “covered call” is a powerful strategy to generate income from your stock investments. TradeStops can help you keep track of your covered call investments.

For this example, let’s assume that we own 100 shares of Apple Inc. (AAPL) with an entry date of last October.

Let’s also assume that we’re willing to sell the stock at $145. This would translate into a gain of about 25%. But we also want to generate a little more income while at the same time reducing some of our risk in the stock.

To accomplish this, we could sell a call option with a $145 strike price. For this example, we’ll sell the May 145 call. The price on the call closed at $2.36 on 3/24/2017. Here is how we enter the trade into TradeStops.

And this is how the position is displayed in your TradeStops portfolio.

We are now long 100 shares of AAPL and we are short 1 call option. Each option contract represents 100 shares of the underlying stock. Therefore, the short option position in AAPL is “covered” by the 100 shares of AAPL stock that we own.

You’ll notice that there’s a gray box under the SSI column for the option position. This is because options do not have Volatility Quotient (VQ) rankings or Stock State Indicators (SSI).

Now let’s set up an alert for this covered call position. To do this, we’ll set up an option alert. We know that the VQ for AAPL is 17.4%. Let’s use that as our stop loss setting for the covered call. Also, let’s use the most recent close of $140.64 as our cost basis. This way we’re not taking more risk than necessary in the position.

Don’t forget to click on the “Add Alert” button.

We now have the alert set up to notify us if the stock closes 17.4% below the adjusted cost basis of $138.28. This adjusted cost basis is the cost that we entered for the stock minus the premium that we received. In this case, it’s $140.64-$2.36 = $138.28.

Our trigger price is now $114.22 which is 17.4% below the adjusted cost basis of $138.28. If AAPL closes below this price, our new Covered Call Alert will be triggered.

We recommend that you create a couple of examples on your own so that you’ll be comfortable entering these trades in your actual investment accounts.

If you have any questions, please contact our Customer Success team.

Tom Meyer
Education Director, TradeStops