Covered Calls – Top 3 Performance Insights From New Research

Today on the show we welcome special guest, Rob, who’s the co-author on our recent research report on Covered Calls. On the show this week we go over the top three performance insights we learned from our massive study on Covered Call Performance. If you trade covered calls right now or plan on using them at any point when dealing with assigned stock, then this show should be required listening.

Key Points from Today’s Show:

What is a Covered Call?

  • A covered call is a combined options strategy that puts together long underlying stock and an options strategy where you simply sell a call option.
  • The reason it is “covered” is because the risk in the assignment of the call option is covered by the underlying shares, always on a 100:1 ratio.
  • You typically sell a call option at a strike price at or above where the stock is trading, looking to use that premium from the call option to reduce cost basis and therefore increase your probability of success.

Why Did We Research Covered Calls?

  • Our goal is to educated traders, and covered calls are usually the gateway into trading options.
  • We wanted to help first-time traders better execute covered calls.

What Did We Test?

  • Started with a large swath of data from OPRA, the industry-standard data.
  • Looked at 20 years’ worth of data, from January 1999 to Mid-2019.
  • Looked at 109 symbols, 70 stocks, 39 ETFs, for a total of 160 total strategies per symbol.
  • These strategies were combinations of dates to expiration, deltas, profit-taking, and stop losses.
  • This generated 5.6 million trades in total that we analyzed throughout the research.
  • Example: Sold a covered call 30 days from expiration at a 30 Delta and let it go to expiration.

How Did We Analyze the Data?

We analyzed the data in several different forms and sorted the data into 3 different buckets:

  1. Performance of the stock and ETFs alone
  2. How the options contract (short call) performed
  3. Covered call strategy as a whole

Top 3 Insights:

  1. Avoid selling covered calls on any single stock — ETFs significantly saw a better performance.
  2. Stop losses are flawed logic — They created more losing trades overall (in the context of covered calls).
  3. Reducing costs basis is not enough.

Profit-Taking

  • Generally, in a lot of strategies, early profit-taking works well to increase returns and reduce drawdowns.
  • However, it is not necessarily the most profitable thing you can do to take profits early.
  • There is a trade-off: if you take profits early, you increase your win rate, reduce the drawdowns and time in the trade, but it is not necessarily the most profitable thing to do at the end of the day – looking at net trades and net gains.
  • In covered calls, sometimes taking profits is not optimal.
  • In many cases, early profit-taking led to 30-40% sub-optimal results. 

Option Trader Q&A w/ Moti

Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. Today’s question comes from Moti:

Hi Kirk. My name is Moti and I’m from Israel and I’ve been following your website and webcast for two years now. I wanted to say thank you for all the work and dedication to your members and community and to keep up the good work. I have two questions to ask. One, I noticed in your past trades and positions that you prefer to open new iron butterfly positions or tight iron condors when the IVR is not in its high range. Can you explain why? My second question is regarding position pricing. It’s almost always getting less than the minimum price in regards to the pop ratio, so how can I tell if it’s good pricing or not? Thank you again and bye now.

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.