Portfolio Tactics: Analyzing Risk When Rolling Your Covered Calls

(Source: Option Generator)

Preliminary conclusion for VEEV

By understanding how the numbers play out and where our real, adjusted cost-basis lies we can interpret risk much more efficiently. Given VEEVA's recent rally, a strike price of $240 or $250 is appropriate for moderately bullish or conservative investors. If we have 200 shares of VEEVA, we can sell one $240 AUG call and one $250 AUG call.

(Source: Pro Realtime)

Overall Conclusions on Monthly Covered-Call Writing

When selling monthly covered calls, we have to analyze our adjusted cost-basis, forward one-month returns and entire portfolio delta. We can roll out and up more aggressively if our risk tolerance allows us to do so, or if we put on defensive, non-correlated positions on.

In-The-Money Covered Call Writing

Let me now turn to CCI, a stock that's currently in the reader's portfolio overwriting segment but can be transformed into a 1-year in-the-money covered call. Having written intensively on this topic, in-the-money covered call writing reduces the standard deviation, overall delta and correlation of our portfolio. In the real-life model portfolio that we share with our premium members, our overall delta looks as follows:

 

(Source: Option Generator)

As for in-the-money covered call writing, we're looking for the following:

  • A long-term leader on the premium watchlist report

  • A stock that has a decent overall rating, but not the best-in-class

  • Possibility of generating a 7+% annualized return

  • 1-year expiration period (or between 9-12 months)

(Source: Option Generator's Calculators)

As always, we need to figure out what returns we can generate per unit of risk. It's the combination of putting various strategies together that make our methodology work in the long run. 

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