Covered Call Writing: How to Avoid Being Called Away On Your Shares

covered call writing

One of the first bosses I ever had was a third-generation owner of International Business Machines (IBM) stock.

Naturally he was one of the first people I know to really talk up the benefits of covered call writing.

Writing calls allowed him to take the moderate dividend yield on his shares and turn it into a larger amount of income each year. He was the first to prove that it’s not what you own, it’s how you own it.

Of course, as a third-generation shareholder, he had a large capital gain on shares, and would have a large tax bill if his shares were called away. So, naturally, he had a few tricks to ensure that the shares weren’t called away and would eventually move on to a fourth generation.

For investors getting started with covered call writing, the idea of doubling your income or better on a dividend-paying stock is a great one. But if you don’t want to get called away, there are a few strategies for increasing the odds of holding onto your shares indefinitely.

Sell calls and keep your shares, too

First, you don’t want to sell covered calls when shares are in an uptrend. Some stocks, like IBM, can trade in a range for years, despite periodic good earnings numbers.

The end result? Shares mostly provide investors with returns from dividends. Then, after a few years, shares may move to a much higher range in a short space of time. This is pretty common with blue-chip dividend players.

The trick is to wait until after an uptrend, and only then sell covered calls. If you’ve managed to earn or inherit a large number of shares, you don’t even have to sell calls against your entire position to make a huge difference in income.

Second, you want to find a strike price that’s potentially achievable, but difficult for a company to hit. Say shares of IBM are around $125. A move to $150 would be huge for them, but not entirely out of the realm of possibility. So that may be a good target strike price when selling covered call options.

Finally, you want to be aware of time decay and let it play out in your favor. Options have a time component, and the time decay (or “theta decay”) is what makes selling covered calls so valuable over time.

If you sell an option going out three or four months, you may want to buy it back when there’s a month or so left on the table. By then, most of the time premium will have gone away.

There will be a bit of residual value, but in today’s world of zero-expense trading it’s better to leave some money on the table and walk away. That’s especially true if you don’t want to lose your shares.

So, yes, it’s possible to sell covered calls in a way that greatly reduces the chances of actually losing your shares. Using these guidelines, you can continue to own your shares, collect your dividends and earn some extra money from the position as well.

Recommended Articles

‘Healthy’ Foods That Might Be Harming Your Gut and What to Choose Instead

As our world produces and demands more processed foods for convenience, marketers are also getting clever. Foods are being labeled to cater to those with dietary requirements or those looking

5 Surprising Countries Where You Can Retire with Less Than $100,000

When retirement is inching closer, you might wonder about the kind of lifestyle you can lead and the level of financial security you will have if you just have about

fire method for early retirement

The Real Truth About the FIRE Method for Early Retirement

The FIRE method for early retirement has taken off in popularity in recent years. But are the risks well understood by its adopters? Retiring as early as possible then living

Feeling Bloated? 25 Natural Ways to Fix Constipation

We’ve all been there. Things are rumbling in your tummy, you feel big and uncomfortable, but you just can’t seem to poop. Constipation happens to the best of us, and

5 Ways to Ensure You Get the Lowest Possible Mortgage Rate

A 30-year fixed rate mortgage is the most widely chosen home loan option because of the high financial predictability it offers. Follow these tips if you want to obtain the

Robots Will Take 52 Million Americans Jobs. Here’s What Will Happen

A new research report compiled by the Brooking Institution reveals that innovative automation technologies are set to replace millions of American jobs. In fact, more than 52 million American jobs in

Online Loan Companies Are No Easy Fix for Desperate Borrowers

If there is one thing that most Americans need right now, its more money. Online loan companies know this — and it's dangerous for many of us. Since the financial

investing in a volatile market

Investing in a Volatile Market for Long-Term Gains

Investing in a volatile market gives everyone the jitters. Novices, in particular, tend to sell in a panic and then wait for the right time to re-enter the market. Selling

Legumes: Nutrient Dense and Delicious, but Watch for These Preventable Side Effects

Legumes: Good or bad for you? The answer is, a little of both. And at the end of the day, what really matters is how your unique body feels when

4 Keys to Successful Retirement Planning

Retirement planning gives you the freedom to live life to the fullest. You can afford to have all the necessary comforts and amenities of life, go on a vacation occasionally,

Do Seniors Need Life Insurance Coverage?

Do seniors need life insurance coverage? Your golden years should be about enjoying the memories of one’s lifetime. Yet the reality of life is that we struggle to pay our bills

Better Investment Than a Casino? Probably a Fitness Club

We all aspire to be healthier. Who doesn’t aspire to lose weight and exercise more as an annual New Year’s resolution? Yet well-intentioned aspirations and actions are not the same