The Best Time For Using Covered Calls

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The Best Time For Using Covered Calls
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• Hi, My name is Steve and Im with Options Trading
  Research, today were reviewing our recently
  published article

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• The Best Time For Using Covered Calls

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• There probably isnt an options-related topic as
  misunderstood yet extremely popular as
  trading covered calls. Covered calls are widely
  used by retail and institutional traders alike.

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• However, I often feel the strategy is
  misrepresented, and sometimes poorly executed.
  You see, a covered call strategy seems simple in
  theory (and it certainly can be).

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• But, it is a far more nuanced type of trading
  than many people understand. If you really want
  to delve into it, covered call trading can be
  quite complex.

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• However, there are plenty of straightforward ways
  to implement covered calls, without getting too
  bogged down in the details. The key is
  understanding when best to use this time-testing
  strategy and when not to.

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• Okay, so when is the right time to use covered
  calls?
• Lets start by looking at an example.
• Heres the chart of JPM

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• JPM has had a fairly uneventful year overall,
  despite the market volatility which reached
  extremes in late summer. The stock has returned
  about 2 so far this year.

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• The share price has also been sitting around the
  50-day moving average for the most part, outside
  of the drop during the stock correction in August.

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• Unlike many other financials (and stocks in
  general), JPM didnt get hit that hard during the
  correction and bounced back quickly. Prior to
  late August, the stock had slowly moved upward,
  in a very non-volatile manner.

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• Now that the market has stabilized, JPM once
  again looks like it could fall into a steady,
  neutral to bullish pattern. That makes it a
  perfect covered call candidate.

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• So now what?

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• Its especially important to identify the right
  stock when making a covered call trade. Picking
  the right stock at the right time can make a huge
  difference in the success of your strategy.

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• We just identified a great covered call candidate
  in JPM. So what makes it so special? First and
  foremost, covered calls work best in a neutral to
  bullish environment. And, thats exactly the way
  JPM has been trading for the last year.

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• Its been up, but not skyrocketing higher by any
  means. Plus, when the market corrected, it didnt
  get hit nearly as hard as many other stocks.

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• Keep in mind, a covered call trade is selling a
  call against a long stock position. The trade is
  maximized if the stock price is right at the
  short call strike upon expiration. For a
  refresher on covered calls basics, follow the
  link.

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• Essentially, you want your stock to go higher,
  but not too high. Moreover, you dont want to
  see a big selloff. A sideways market is great,
  but a slightly bullish trend is even better.

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• The thing is, were talking about the most common
  market condition! Thats what makes covered calls
  so useful. In the majority of instances, the
  trade will work.

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• And dont forget, its not just the yield on the
  calls which adds cash to your portfolio (month
  after month). The long stock position can really
  boost your profits as well.

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• JPM makes an excellent candidate for covered
  calls for other reasons as well. Notably, its
  generally perceived as a strong company worth
  holding for the long-term.

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• It also has strong fundamentals. That means
  theres likely a floor to the downside. Whats
  more, the company offers a dividend of nearly 3.
  

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• Not only is it another reason the shares are
  likely to be held for the long-run, but its
  accretive to your total yield.

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• In other words, if youre using a JPM covered
  call strategy, youll get your yield on the short
  calls plus the dividend yield each quarter!

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• Heres the bottom line
• Covered calls can work in a variety situation,
  but the best time to use them is when you have a
  healthy stock in good market conditions. A
  company without much downside is a huge benefit.

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• And, if you can throw a dividend into the mix,
  its even better.
• Well have much more on covered calls moving
  forward, so stay tuned!

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