Option Trading College

Subject: Covered Calls
Instructor: The donFranko
Length: 6 sessions


 Training  Home

Entry is Key...Exit is Everything! TM

Session 1 – Covered Calls explained


A covered call means you already own the stock: your position is covered and you only risk having your shares purchased or "called" at the strike price. ... If the stock stays below the strike price, then the option expires worthless and you keep the premium for a profit.

Do you want to make consistent and predictable returns each month? Executed properly, you can conservatively make 1% - 3%, or for a more aggressive style of trading, you can possibly make as much as 5% to 10% per month on the stocks you already own. Many investors do not know they can actually start collecting premium (rent) on their shares and instead, they watch their portfolio values swing up and down month-to-month. I have some good news for you! There are option strategies you can employ that can save your portfolio value from the roller coaster rides, and in some cases, make you more money than you lose in value just watching the stock you own gyrate.

If you take the time to learn this valuable technique, you just might be able to do something exciting like: buy a new car, boat, house, gifts or donations without spending any of your own money! Compare that to the paltry returns you get from other passive investments like CD's or Mutual Funds and the skies the limit!

The technical name for this strategy is writing covered calls. Writing, in layman’s terms, means you are selling the right for your stock to be purchased by someone else; and in return, you are getting paid a premium (rent) for offering up your shares at a predetermined price; if those shares are trading "above" the CALL contract you sold at expiration day.

The primary goal is to collect premium and NOT necessarily sell your stock; however, this takes some homework on your part and you should be conservative in your approach to avoid having your shares sold—as this will create a short-term trade and change how you are taxed on the profits; however, if you set up your trading account in a ROTH IRA, then you have no issues and can build your wealth over time TAX FREE with this awesome strategy.   

On the other hand, if you are looking for month-to-month cash flow and you do not mind being a short-term trader (holding a stock less than 12-months), then the best way to trade this strategy is forming an LLC "trading-business" so you get maximum value on tax treatment, mark-to-market accounting and full use of any loss carryovers so you can save a lot on taxes and build your wealth much faster.

My top pick for this strategy is Apple Computer (AAPL) for several reasons.

1. They are the largest Market Cap company in the world ($2.1T)...that means just about every Hedge Fund, ETF, Municipal and whale investors like Warren Buffer want to own this companies stock.

2. Just about everyone in the investing world either trades, owns it or wants to get a piece of the Apple pie, so that makes a massive amount of demand for the shares...even when they sell off!

3. They pay a dividend which means all those fund mangers want to park a lot of money in this companies shares to collect a share of the companies profits every quarter.

4. The amount of liquidity in the options practically guarantees you will always get filled on any amount of contracts you buy or sell.

5. You can trade this strategy on AAPL with confidence knowing that this company is here to stay and will continue to grow their share price and your wealth accumulation.

NOTE: You can apply this strategy to any stock (companies) you like, but I am going to focus on AAPL for this training.


Trading (Start Here)


Controlling Losses



A month in the life



A month in the life


Day Trading Intro


Covered Calls



Naked Puts

Naked Calls





Model Portfolio

Day Trades

Lotto Trades



Training Links


Bull/Bear 180's

Day Trading

Risk Free Trading

Hit Options Lotto






Session 2 – Example of a Covered Call

Here is how it works.

When you are selling covered calls, the rule-of-thumb is to ONLY buy shares in a company you 100% want to own. You should NEVER do this strategy on crazy volatile stocks because they can suffer massive price swings and get you stuck in a long-term recovery phase...we want to make monthly cash-flow, so stick to the solid companies like: AAPL, QCOM, MSFT, GE, ADBE, COST, etc. If you stick to large market-cap stocks that have consistent trajectories on monthly charts, then you will have a nice steady income and be able to sleep at night knowing you are collecting that rent month-after-month!

The rules of this game:

1. Look for your stock to bounce off a known support level and begin to move higher (see Charting 101) on stronger than normal volume.

2. Buy your shares in increments of 100 so you can sell the CALL contract and begin collecting the rent money!

3. Wait for the stock to reach a known resistance level and then sell a strike price at or just above that resistance level with an expiration date 30-45 days in the future.

4. Sit back and follow the progress of your stock week-to-week until your covered call options expire and collect all that rent!

Typically, you should already own the stock you plan to sell covered calls on; and you should have some profit in this stock  before you start looking to collect some premium (rent) on your investment. The idea is to collect premium and not necessarily  have your stock called away from you at expiration; therefore, the conservative approach is to sell options when your stock is at strong resistance level and you anticipate a drop in price is probable in the next few weeks. That way, when the stock pulls back, your option premium collapses and you keep the money you took in.

For a more aggressive approach, you can buy today and then immediately sell at or in the money (ITM) option strikes to pick up more premium, but you risk having the stock rise above your strike price by expiration and your shares will be called away; however, if you do not care about that, you can just sell whatever strike price can pay you the most premium to capture that "rent".

Of course, if the stock does get called away, then you have created a short-term capital gain, and depending on how long you have owned that stock, you will incur higher tax consequences; therefore, the wise investor does not want to necessarily pay a higher tax rate on the stocks profits and only sells covered calls when the probabilities the stock pulls back are much stronger.

Here is an example of a covered call on AAPL.

As you can see from this monthly chart, AAPL been on a solid trajectory for multiple years and even when it pulls back for a couple months, it always finds support (investors) and continues its up-trend.

Now depending on your trading timeline, you either wait for the stock to pull back for long-term trades or just jump in today for short-term trade styles.

The two events you want to pay attention to before you start is Dividend payout dates and earnings reports; which happen to be coming this month and that tends to keep a lot of buying pressure on the stock until these events are over.

Therefore, if you are a long-term investor, then you would wait to start selling covered calls AFTER these events have concluded so you have a higher probability that profit takers will step in and drive price back down to support levels so your covered calls expire and the stock is below your sold strike price.

On the other hand, if you are a short-term trader, then you just start at any support or resistance level and let the chips fall where they may—always collect that premium month-to-month.

Here is today's option chain to see how much premium you typically collect in (34) days depending on the strike price you sell:

If you anticipate the stock will continue to rise after you buy it, then consider selling OTM strikes so you can "double-dip" and collect both call premium and stock appreciation.

If you anticipate the stock will pull back, then you can sell ATM call premium and get a solid amount of RENT!


Long-Term Investor

Buy 100 shares of AAPL at $139.96 ($13,996.00).

Sell (1)  6 Aug 2021 145 CALL and collect $2.08 of premium if the stock remains under $145.00 per share by expiration; however, if the stock does close above $145 you make a profit on your shares AND you get paid additional premium (rent) of $2.08 per share at expiration.


Your net ROI  on this trade is:

If the stock trades below $145.00 by expiration, then you keep your stock and collected the rent for the month.

Short-Term Investor

Buy 100 shares of AAPL at $139.96 ($13,996.00).

Sell (1)  6 Aug 2021 145 CALL and collect $2.08 of premium if the stock remains under $145.00 per share by expiration; however, if the stock does close above $145 you make a profit on your shares AND you get paid additional premium (rent) of $2.08 per share at expiration.



Your net ROI on this trade is:

Now, if the stock rises above $145.00 by expiration, your CALLS will be exercised and your shares will be sold at $145.00; which give you a profit on the shares and you also got paid an additional $2.08 in premium!

Source: https://www.calculator.net/roi-calculator.html

NOTE: If the stock really takes off, anything over $145.00 is not yours, but that is not a concern because you are just going to repeat this process and keep collecting that rent.

As you can see, either trading style pays a solid annual ROI vs. just buying a stock and holding onto it for the long term as you watch it gyrate month-to-month.

Session 3 – Tweaks On Covered Calls

Here is another tweak on this type of strategy.

If you do get the stock called away from you, and you still like the stock at those higher prices, but its near a resistance level, then just sell a naked put and take in more premium hoping the stock actually drops back down and gets put to you.

If the stock falls in price before expiration, and it's trading below the strike price you sold the naked put at, then you will have the obligation to buy that stock at the strike you sold and you get to keep 100% of the premium you took in from the naked put!—this means you get paid to buy back your stock.

Here is an example:

Say you sold the July 2nd 138 covered calls and since AAPL closed at 139.96 on expiration day, you will be called away. You kept all the premium you sold, and you also made the difference in the stock price you paid and the price you were called out at...a win/win!

Next you sell the closest PUT strike that is at or slightly in the money a month in the future and collect that premium!


This means that if AAPL stock is trading higher than $140 per share by 8/6/21, you DO NOT have to buy the stock and you get to KEEP all the premium you were paid! On the other hand, if the stock is trading below $140 per share, then you will must buy the shares again; however, you cost basis is actually $135.85 per share, so you bought them wholesale. Next you simply sell another covered call and keep collecting that RENT!

Selling "naked puts or calls" typically requires a larger account ($50k or more), so you need to check with your broker to see what they will allow you to do with a smaller account; otherwise, you just buy the shares again and continue to sell covered calls.


Advanced Tweak

Here is another way to do covered calls without actually owning stocks vs. selling a naked put—this is especially beneficial if you have a small account. 

You can purchase a deep in-the-money (ITM) LEAP options, and then write covered calls against those LEAPS. This takes more work because you do not own the underlying security to be delivered to the buyer of those calls if you were to be assigned; however, you can either participate with a lot less capital than buying the stock outright. When you buy deep (ITM) LEAPS CALLS, you should always buy a minimum of 1 year or longer, pick strikes with a Delta of .80 or higher and then sell covered calls month-to-month at "resistance" levels on the stocks current price. That way, you gain appreciation in the LEAP as the stock rises over time and effectively reduce your cost basis with expired covered calls when you sell them at resistance levels and the stock pulls back expiring the calls. If you do this correctly, you should be able to collect enough premium to pay off the LEAPS well before they expire and make even more profit from the stock/LEAP appreciation.

Even if the stock falls in price down to the LEAP strike you bought (low probability if you pick solid stocks like AAPL), the LEAP will still have some time premium and potential intrinsic value until expiration so you can easily manage the trade and come out of it with at least a break even if not a profit!

If you sell covered calls against the LEAP and the stock explodes higher (well beyond your covered call strike), then those options will be exercised and you will need to close the entire trade. If the strategy was implemented properly over a few months, then your LEAP will have a lot of profit  appreciation and you can sell it, buy the shares should realize an overall profit and will NOT have to buy and then deliver any shares. The other way out is to "roll" the position into the future before expiration and extend your duration so you can manage it and eventually overcome any negative effects.

I would not recommend selling covered calls or naked puts on highly volatile Internet type stocks unless you have an iron stomach and can pretty much be a full time trader watching it. In fact, just stick to the slow movers and you will be much happier.

Covered call writing is a conservative strategy for collecting premium (rent) on your stocks and not meant for high risk trading styles.

Session 5 – Account Protection tactics   

Here is another way to save your account value and possibly make a bundle of extra profits along the way. This twist works best on more volatile stocks so if you own shares in hot stocks like AAPL, GOOG, BIDU, CMG etc. then you should consider this to protect your future value. Stocks like these have very large swings in price year-to-year and rather than watching your portfolio value swing up and down in value, you may be able to maximize things.

I have a friend who happens to own 4,000 shares of AAPL and has no idea how to use his massive leverage to make a boat load of cash. Apple is a very volatile stock and over the past few years his portfolio value has swung up and down close to a million dollars. He has held onto his shares since his early 20's and because of splits he has grown his shares to 4k last I spoke with him. The sad thing is he is clueless about options and therefore has reservations about applying these tactics. When I found out he had that many shares I told him to learn about this tactic so he could protect his portfolio value. Well, he did not choose to do that and shortly after our meeting, AAPL took a turn for the works and dropped over $120 dollars in value. He was dang near a millionaire on paper one year and the next was was a multi-thousandaire.  Now had he learned how to leverage his stock with Covered Calls, he could have made thousand of dollars as the stock dropped and tens of thousands more if he employed this tactic I am about to reveal.

Well, that was back in 2008 and now its 2012 and AAPL is at all time highs. He is now close to being a milti-millionaire on paper, but with the stock at these massive highs, there is a very strong possibility AAPL could take a turn and head back down to the 200 price range. Who knows, but now that he's getting older he needs to consider protecting his portfolio value before he loses hundreds of thousands of dollars again.

The smart strategy here is to watch for AAPL to lose value at a resistance level and then sell covered calls to collect the premium; however, rather than pocket the cash, you invest it in OTM puts that way, If the stock take a turn for the worse, you will lose a lot less portfolio value, because the puts you picked up for FREE will have the potential to become very profitable.

Tomorrow is Apple's earnings report, and if they miss, this stock is going to see some lower prices. Even if they beat, the current run up in price will most likely create a "sell the news" event and still head lower. Either way, he stands to lose portfolio value if he does not take proactive action to mitigate it. It will be a sad day for him, if APPL starts to drop from these lofty highs and NEVER returns . It will be tens of thousands of dollars lost that he will not be able to recover for a very long time...if ever. Then again, the stock could just continue to climb in value, but you have "nothing" until you actually sell, so why not learn how to collect rent along the way and maximize your investment.

Here are today's option prices:

Now we will wait until earnings are announced and see where the stock ends up before we make a covered call play with married puts.



Profits Up!

The donFranko 


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