Selling Longer Dated Covered Calls

Summary

  • For stocks that you would like to own long-term, especially secure dividend stocks, now is a good spot to write long-term covered calls.
  • Writing long-term covered calls gives you the premium generated by today’s high volatility and the long time duration.
  • Look at your holdings and spend the time to do this, the recovery will not be quick.

Covered calls are an easy way to generate portfolio income without creating an obligation to buy new stock (like selling a put does). Here, stop, read this if you haven’t, or even if you have, and spend time reading from the links: 

Don’t You Dare Trade Options Until You Read This!!!

Volatility, Time Value & Premium

In times when volatility is high and outlook is uncertain, but you have core holdings you would like to hold onto, selling a covered call is a solid approach.

In general, option premiums are higher when volatility is higher.  Selling covered calls captures the volatility in the market via a premium paid to you. 

All options have what is called “time value.” The length of time an option is in effect has a direct effect on premium. The sooner an option expires, the lower the premium. The longer to option expiration, the higher the premium. 

Normally, you will sell a covered call for 2 or 3 months in duration, slightly out of the money, on daily overbought signals during a bull market. That gives your stock room to run or reach an ex-dividend date. When you sell on daily overbought signals, the stock will often fade a bit allowing the option to expire or be bought back in cheaper than you sold it for. Even if your stock gets called away you make a profit. 

When a recovery period for the stock market or stock is uncertain, or expected to take time, selling a longer dated covered calls can make sense. You will capture today’s volatility and the higher time value.

I am writing this during the Coronavirus crash, but any challenging period can make sense to do this. You have also heard the phrase, sell in May and go away. Well, late spring is often a good time to sell longer dated calls to collect extra premium during the seasonal lull period in the stock market, which is generally June to October. 

When selling longer dated calls, you will need to manage your option positions. This is not a set it and forget it trade strategy. If the stock market rises significantly, you might want to close your call position. Usually, however, if there is a decline in the stock market, you might consider buying your calls back in if there is still a chance for a rally to have the stock called away. If there is a subsequent rally, then you can sell another batch of covered calls. Think through this ebb and flow approach. 

Sample Long Dated Covered Calls

Enphase (ENPH) many have cost basis in the $30s. Look at the November $40 and $50 calls. Consider your goals and that ENPH is likely going higher in coming years, but maybe not this year. I have been writing covered calls at two levels and leaving about 15% of my positions uncovered. 

Sunpower (SPWR) many have a cost basis after put premiums around $6. Look at the September $6 and $8 calls. Same story and approach as Enphase. 

Take a look at some of your dividend payers as well. I think you can look at the January 2021 calls on some of those for all or part of a position. 

Disclosure: I am/we are long ENPH, SPWR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have sold covered calls on both SunPower and Enphase.