Here are twelve fast facts about writing covered call options on your stock holdings:

  1. A covered call gives the buyer of the call the right but not the obligation to call away your stock at the strike price.
  2. The option chain you want to trade has to have liquidity to avoid losing too much in the bid/ask spreads.
  3. The farther out you go from at-the-money, front month options the less liquidity you will have.
  4. A covered call option is the same as a naked put option. You are accepting a small option premium to take on unlimited risk to the downside.
  5. Stop losses on your stock holdings are crucial to limit the downside risk.
  6. Covered calls act as a stop gain on the upside of your holdings.
  7. Out of the money covered calls can give you room to collect gains in your stock before the covered call goes in the money.
  8. If a covered call option goes in the money you have to buy it back with the profits on your stock or let your stock be called away.
  9. Covered calls are great tools when you are writing at the price you want your stock to be called away at so if your call goes in-the-money you win.
  10. Covered calls can generate on going income in a stock that is a long term holding any way.
  11. Covered calls should only be written on leading stocks that are in an uptrend.
  12. Never hold a covered call through an earnings announcement due to the downside risk in the underlying and the capped upside.