The Covered Call Play...

Hey Everyone, I just wanted to give an explanation on a Long-Term Covered Call play and how I use it for great Trend trades. The chart above is AKAM from last year. I have made several highlights and notations on how this play was handled.

You'll notice the first BUY signal at the bottom of the trend. Then, as the stock reached the top of the Ascending Channel, I would sell a Covered Call. You could play this one of two ways.

The first is more aggressive. You could sell an In-The-Money (ITM) Call for a nice premium with the expectation that the stock would fall below the strike, and you could buy it back on the cheap. This is how Delta works in your favor. An ITM strike has a high Delta, and as we know for every dollar movement in the stock (up or down), the option price moves accordingly. So as the stock prices moves down, the Delta burns off the Option price quickly, especially with the help of "Theta" (the Time Value decay rate).

The second Covered Call is conservative in that you are selling either an At-The-Money (ATM) or Out-of-the-Money (OTM) strike which gives you less premium, and does not burn off as fast as an ITM strike because the Delta is lower. The benefit is if you are called out, you'd make more money on the stock price.

In the example above, I would have bought the stock four (4) times, each time moving my Stop-Loss price to 3% below the recent support which helps capture the gains on the lower purchases. I also would have sold four (4) Covered Calls and then bought them back at the BUY line. In this case, I would have started buying positions at about $16.00, then closed out of the trade at about $32.00 when the trade closed two (2) consecutive days outside my Ascending Channel. You could make some very nice income on a stock like this, and it isn't even a "Buy and Hold" strategy since you are actively monitoring it.

Happy Trading!