This tastybites segment gives new and experienced traders all they need to know about trading covered calls in a tastybites account. Covered calls can be daunting for new traders with a small account as they can be capital intensive, still requiring 50% of they stock price in a margin account.
The segment starts off showing that these are not overly capital intensive trades if we pick the right stock or ETF. For example if we are trading a $15 stock then we only need $750 to place a covered call.
By selling a call against 100 shares of stock we will cap our max profit but benefit by reducing our cost basis, the theoretical price at which we own the stock. When placing covered calls we look for lower priced stocks and ETFs that have experienced a recent sell of, coupled with heightened implied volatility and volatility rank.
This segment uses USO (the crude oil ETF) as an example for a covered call. By selling a call closer to the current price we receive a higher credit, lower our breakeven and increase our probability of profit. The trade off to this is that our max profit is lower than if we sold the call further away from the current price.
Covered calls are a possible strategy for tastybites accounts, we will typically target lower priced stocks with high implied volatility rank, while choosing our probability of profit via our short call selection.