As many people are aware, covered calls are a great way to hedge your positions, and potentially enhance the returns on your portfolio.  I have written quite a bit about them, as well as selling naked puts.  The volatility in these markets makes 2008 the year of the covered call and naked put selling.  For those that understand the theory on options and covered calls, but are stuck on the order entry syntax, here is a primer for a few popular platforms.


Prerequisites for covered calls:

  • You understand the concepts of options and covered calls.
  • You know how to pick your own strike price and expiration month.
  • You have purchased or intend to purchase 100 shares of stock to COVER your call.
  • You have an account approved for options.  If not, call your broker and ask for an options form.

Assumptions for the examples below:

  • Today is November 7, 2008 and the example below assumes writing a covered call on Apple (symbol AAPL).  Note:  This is NOT a recommendation!
  • AAPL trades at 98.24, and the December option chain for AAPL is shown below, per Yahoo Finance:
  • Write a 100 strike December covered call on Apple

Steps of writing a covered call:

  1. Start by purchasing 100 shares of an optionable security.  Our example uses Apple (AAPL).
  2. Decide on expiration month and strike price to sell.  Our example uses a December 100 strike.
  3. Open the trade options order form for your broker.   The Scottrade options order form is shown below.
  4. In the buy/sell (or similar) box, there are usually four choices – Buy to Open, Buy to Close, Sell to Open and Sell to Close.  For a covered call, select “Sell to Open”.
  5. Contacts – For a single covered call involving 100 shares, then the number of contracts is 1.  The money received from selling a covered call is equal to 100 times the quoted price in the option chain.
  6. Symbol – This is where syntax matters.  In the image above, Yahoo Finance lists the AAPL December 100 strike as “QAALT.X”.  But the option syntax on the order entry forms for each broker can be completely different.  For Scottrade, it would be entered as “.QAALT”, for Fidelity it would be “-QAALT”, and for Tradeking it would be “QAALT”.  Call your broker directly if you need help with the syntax.
  7. Order Type – Market or Limit.  For options trading, I NEVER use market orders! I’ll start with a limit order somewhere in between the BID and the ASK.  If it doesn’t get filled after a few minutes, then I’ll change my order accordingly and try again.  As an example, if my limit order of 8.35 is accepted, then 100 times that amount ($835) gets deposited into my account immediately.
  8. Duration – Day order only means that if it doesn’t get filled today, then the order is cancelled.  Good until cancelled means that your broker will keep the order open until it gets filled or until you cancel it.  In some cases, your broker may have a time limit such as 30 days where they will cancel open orders regardless.

Aftermath of writing a covered call – In theory you could do nothing and just wait.  If Apple is above 100 per share at December expiration, your broker will automatically take your 100 shares away from you, and deposit an additional $10,000 in your account.  If Apple is less then 100, your shares But you do have other options.  You can close the contract early by using a “BUY TO CLOSE” order.  Doing so would leave you with just your 100 Apple shares and you would then have the option to sell a January, or other covered call and collect additional premium.

Appearance in your account – There are two things that confuse first time covered call writers.  The first is that covered calls appear as a negative quantity in your account.  Once you sell a December Apple 100 strike, it appears in your account as a quantity of negative 1, with a corresponding debit value (i.e. -$835).  Second, options are less liquid than stock.  It is possible that even if a stock rallies 10 or 20% on a single day, the last option may not have traded for several days prior.  In those instances, the value of the options in your account usually reflect the last traded amount, and not an amount resembling the current BID/ASK values.

Other Geldpress articles on covered calls:

Also, I highly recommend the following book on covered calls.  Free articles are great, but if you are going to trade, then you need to get serious and spend a few dollars on a good book.

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The $81.90 is a worthwhile investment to slow or stop the bleeding in your accounts, and the 4% Amazon commission will help support this site.  Also, check out the Geldpress bookstore for other great options books.

Covered Calls and LEAPS--A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading)
Covered Calls and LEAPS–A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) by Joseph R. Hooper