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Covered Calls: Comparing Strategies

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

This segment discusses the bullish strategy of a covered call and reveals the study results comparing two different covered call strategies against being long stock. The optimal strategy is discussed and the hard data is provided.

Selling covered calls is a bullish strategy. The question to be answered is should those calls be sold at-the-money (ATM) or out-of-the-money (OTM)? Also answered is how the separate strategies perform under different market conditions.

For the study, we compared three different strategies: One was buying the S&P 500 ETF (SPY). The second was buying the SPY and selling an at-the-money call (ATM) one month away. The third strategy was buying the SPY and selling a 2% away (meaning price of the underlying plus 2%) out-of-the-money call (OTM) one month away. Monthly options were used and dividends were received and accounted for.

A graph displayed the percentage change of selling 1 month 2% OTM calls against the SPY, selling 1 month ATM calls and just holding the SPY long. One strategy clearly outperformed the others. The chart went back to 2000.

A table was displayed of the 3 strategies mentioned. The table showed the average month returns on the SPY, best month, worst month and percentage of positive months.

In a strong bull market, it is difficult to outperform a long approach. In a volatile or bear market, the ATM approach outperforms the others. The credit received buffers the loss in the stock. A second table was displayed showing each of the 3 strategies in more volatile markets including September 2000 to September 2002 and October 2007 to March 2009.

Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista for the takeaways and to see what the data shows on whether to sell an ATM or OTM call against a long stock position.

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