5 Tips for Covered Call Traders - Tip #3

Stick with Short Durations

When I stay stick with short durations, I am referring to the short call portion of a covered call position. When you're short a call, you want that call to decline in value. One component of an option's value is time, and the closer the option is to expiration, the smaller that value gets.

Therefore, I find it best to sell call options that are a month or two to expiration. In addition, when you are selling a month or two out, you can avoid volatility-inducing events (which can increase the value of an option) like earnings reports. Remember, higher volatility means higher options prices, which isn't what you want when you are short an option.

I knowingly and stupidly broke this rule with by performing a covered call trade on Raymond James Financial (RJF) on Monday, a day before earnings, and the stock has fallen over $3 since then, putting the trade in the red.

I am now paying the price for my cockiness - don't be as dumb as I was!

The Rest of the "5 Tips for Covered Call Traders" Series

Tip #1 - Pick a Stock You Believe Will Go Up!
Tip #2 - Shoot for the Clouds, Not the Stars

Tip #4 - Watch Those Commissions!

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