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Increase your Sales Price and Profit by Selling Stocks with Covered Call Options

Sell even higher than your target exit price using derivatives

By Sudhir SahayPublished 3 months ago 4 min read
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Increase your Sales Price and Profit by Selling Stocks with Covered Call Options
Photo by Chris Liverani on Unsplash

Bull low, sell high. That’s the holy mantra for investors who want to maximize return. But, how do you do that?

Last week, I wrote an article about how to reduce your entry point for investments — i.e, buy low — using put options.

Today’s article is about the other side of the trade: How to use covered call options to maximize your sales price.

Before we get started, if you haven’t been exposed to options or have limited knowledge about them, please read the following article which provides you a quick overview on how they work.

Here’s how I use covered call options to get a more advantageous sales price:

  • Determine the target price at which point I’d like to sell a stock that I already own
  • For volatile stocks which can garner higher option premiums, I sell a call option with an exercise price set at the target price or higher
  • I determine the exercise price at which I sell the options based on my level of certainty around the target sales price. For stocks where I have a high level of conviction on the target sales price, I typically sell the options at exercise prices equal to my target sales price. For stocks where I’m less certain and where I think there’s a potential for even further appreciation, I sell out-of-the-money options with strike prices 10%+ higher than my target sales price
  • Pocket the premium. It becomes either an addition to the sales price if the call option is exercised or profit if the price never rises to the target

Now, like any method, using options has pros and cons:

Pros:

  • Selling covered calls pays off in two ways: if my option is exercised, I get an addition from the current price by selling out-of-the-money puts on volatile stocks. If it doesn’t get exercised, I pocket the premium less transaction costs as profit. Based on my personal experience in the last two years, about 25% by value of my sold calls have been exercised so I’ve pocketed about 75% of the premium value
  • This method is less risky than selling uncovered calls where you don’t own the stock. The potential loss with those types of sales is unlimited. If the stock price goes up significantly higher than the exercise price, you would have to cover the difference between the price of the stock at the time the option is exercised and the strike price. I never sell uncovered call options as the risk is too great
  • If the stock pays a dividend, I get to keep receiving the dividend between the option sale and the expiry date
  • I get the premium up front and can redeploy that capital to other purchase or earn interest on those monies

Cons:

  • Selling covered calls requires owning and holding the stocks which would be provided to the buyer in case the option is exercised throughout the lifetime of the option
  • Options are based on lot sizes of 100 shares, so you have to be invested in a meaningful amount of that stock to use this strategy
  • You aren’t guaranteed to sell the stock as the stock’s price may never reach the exercise price of the option. This means that you would still hold the stock if the price falls from where you started the process
  • You also risk losing out on any appreciation in the stock above and beyond the exercise price. Now, if you’ve sold the option with the exercise price at your target sales price or higher, this isn’t really a big issue as you would have sold at your target price in any case

This completes today’s post on Selling Stocks at Higher Prices with Covered Call Options. The practical steps you can start taking from today’s post are:

  • Take some time to learn about how options work and how they are priced: Like any financial instrument, they have intricacies in how they work, are priced and the valid place they can play in your portfolio. Read my article What is an Option and How are they Used in Investing which provides the basics of options as a starting point for your learning:
  • Determine which stocks that you own which you’d would want to sell using call options method: I sell call options for volatile stocks which are close to my sell target. For stocks where I have a high conviction on the target sales price, I sell options with exercise prices at the target sales price. For stocks where I’m uncertain about my target sales price, I sell out-of-the money calls at an ~10% higher exercise price than my target sales price to maximize my premium while also getting an additional price impact if the option is exercised.
  • If and when you do add options to your investment mix, make sure to start slow with small dollar values and cap your exposure in case the option does not work out the way you want: Remember that there is a lot of leverage embedded in options which can have a large negative impact if you make a “bet” that doesn’t work out.
  • Please also note that I am not a financial advisor and I am sharing what we are doing with our investment mix for information purposes only: Do your own due diligence before you make any investment decisions.

Thank you for joining me on my journey to build financial literacy for young adults and their families. Please share any comments or questions that you have in the comments section. If you are interested in reading more of my posts, please access my author page (https://vocal.media/authors/sudhir-sahay) where you can see all the posts I’ve published. Also, if there are any topics you’re interested in my broaching in future posts, please let me know. In addition to the comments section, I can be reached at [email protected].

stockspersonal financeinvestingadvice
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About the Creator

Sudhir Sahay

Sudhir Sahay is a Sales and Marketing executive and a father of two young men. Sudhir hopes to share his journey building basic financial literacy for his children and providing savings and investing advice to their friends and peers.

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