Covered Calls for Increasing Your Wealth | Covered Calls for increased Wealth NYSE image Stock ticker

This method uses the Investor Business Daily (or IBD) tables and other data to determine potential buy-write covered calls.

This method does not guarantee success, but rather narrows the universe of optionable stocks to the ones that have a higher likelihood of success. By narrowing down the possibilities to candidates that meet or exceed certain factors and indicators, you increase your odds for making money with covered calls.

Before You Start with Covered Calls

▶︎▶︎▶︎ Review Basics of Covered Calls

Check overall market conditions. Covered calls are designed to work best when a stock and/or the overall market is neutral or trending slightly upward. Do not trade covered calls when the market or a particular stock is very choppy, undecided, or clearly going down (or even up very rapidly). To check the overall market, see QQQ, or other indicators (SPY, Pre-Market Trading).

▶︎▶︎▶︎Get 12 Complete Options Trader Training Modules

How To Pick the Stocks for Covered Calls

How to use data from the IBD and other sources to determine buy-write covered call stock candidates.

  1. Look through IBD tables for optionable stocks that meet or exceed the criteria
  2. Compile the list of candidates
  3. Check technical and fundamental data for each candidate
  4. Decide which candidates to buy
  1. In a current IBD, Section B1 – Making Money, find the NYSE and NASDAQ Research Tables, and go through all 33 sectors, starting with 1. Chips. The sectors are listed with strongest first, so be sure to start with #1. Look for stocks with the following criteria:
    1. Composite Rating of 90 or above

Combines all five IBD SmartSelect Ratings from 1-99

  1. EPS Growth Rating of 90 or above

This compares a company’s last two quarters and last 3-5 years of profit growth to all other companies. A 90 rating means earnings outperformed 90% of other companies.

  1. Relative Price Strength Rating of 90 or above

This measures a stock’s relative price change in the last 12 months compared to all other stocks.

  1. 52-Week High – stock is trading at or near its 52-Week High

The price is bold if the closing price was within 10% of a new price high. Look for stocks near NH or within 10% of NH

  1. Close Price – the stock price must be at or under a certain dollar amount, determined by the amount of money you want to invest and the amount it costs to buy a minimum of 100 shares, going up in 100-share lots
  2. Stock Tradng Volume –1-2 million is best for liquidity

Also, check the options trading volume. Volume for the candidate must be above 400,000, so that there are enough buyers/sellers for liquidity of the options contracts. Disregard any candidates with a low options trading volume.

  1. If the stock is optionable (shown by a little “o” at end of line)

Want more PASSIVE INCOME Ideas?

Example of a Hypothetical Buy:

-from IBD Sector 23. Mining 

97 92 92 A B- 91.4 CLiffsNtl .7 CLF  85.46 +2.37 -17 2.7m 15t/o

Composite Rating >90EPS Growth RatingRelative Price Strength Rating52-Week HighClose PriceOptionable or not?
  1. Compile your list of candidates, noting the abbreviations, the sector, the sector’s strength (remember, the sectors are listed from best-performing to least in the IBD) and anything else that differentiates them at this point.
  2. Next, check the technical and fundamental data for each candidate. Consider these (and any other factors you think are important) to evaluate and further disqualify any stocks, narrowing your choices down to only the best candidates. These data and factors include:
    1. Technical: Stock charts and graphs (more on this later)
    2. Fundamentals: Earnings Reports and upcoming earnings report releases, 
    3. Other factors: Company story, news
  3. Depending on the amount you plan to invest and how many different buy-write stocks you want to purchase*, pick the best candidate(s).

Summing It All Up

You are looking for optionable stocks with these qualities/criteria/factors:

  • From the best-performing sectors in the current market
  • A Composite Rating, EPS Growth Rating and Relative Price Strength of 90 or above
  • Trading at or near its 52-Week High
  • Trading at a cost you can afford to buy, in 100-share lots only
  • Trading at high enough volumes for options contract liquidity {Options Trading Volume vs “Open Contracts”—if Open Interest is too high, then not enough contracts being bought)
  • Technical and fundamentals in support of a BUY

▶︎▶︎▶︎Top Dividend Screener

How To Buy Stocks for Covered Calls

  1. Purchase the stock(s) in 100-share lots
  2. Sell the option(s) – “Sell to Open” 
  3. Collect your premium
  4. Monitor the stock and the option
  1. Purchase the stock(s) you have chosen as the best candidate(s). You must buy the stock before you buy the option, because a covered call requires you to already have the underlying stock in your account. Be sure to buy the stock in 100-share lots, because each option contract represents 100 shares, and you do not want to have extra shares leftover for no purpose.
  2. Sell the covered call option(s). This is known as “selling to open,” because you sell a covered call option contract to open the position. To do this, see the example below from Schwab:
  1. Collect your premium (!). As soon you sell your options contract, you will see the premium appear in the Cash portion of your brokerage account. Reinvest as you wish, after the money has settled.
  2. Monitor the stock(s) and the option(s)