Covered Call Option Screener

Hi, and welcome to the Options Learning Center. I'm going to show you how to sell covered calls and use Barchart to get the most out of the strategy.

What is a Covered Call?

A call option gives the buyer the right but not the obligation to buy a specific asset (underlying stock) at a specified price (strike price) before or at a specified time (expiration date).

Meanwhile, a covered call is an options strategy that involves selling a call option on stocks you already own.

As an option seller, you'll most likely want the call to expire worthless so you can write another covered call on the same position. However, if the option expires in the money or you're assigned, you'll sell 100 of your underlying security to the holder at the strike price, times the number of contracts sold.

This bullish strategy allows investors to generate additional income from their holdings while capping the potential profit.

A covered call can also be made through a “buy-write,” where an investor buys a certain underlying security and sells a call option against it, with the expressed intent of having the underlying security assigned for maximum profit.

The Goal of Selling Covered Calls

The primary goal of the covered call strategy is to generate additional income through premiums collected from selling call options on stocks or ETFs you already own.

Covered calls are particularly beneficial when you expect the stock price to remain relatively stable or rise moderately.

Strategy Type

A covered call is a bullish strategy that is suitable when you expect the underlying stock to rise moderately in the short term.

The keyword here is “moderately” since writing a covered call limits your maximum profit. You will register an opportunity loss if the underlying stock price rises significantly above your strike price.

Potential Reward (Max Profit)

The maximum profit in a covered call strategy is capped at the strike price plus the premium received.

This occurs if the stock price rises to or slightly above the strike price but does not exceed it significantly.

Downside Risk (Maximum Loss)

The maximum loss in a covered call strategy is the same as owning the stock outright minus the premium received. The loss can be substantial if the stock price drops significantly, though the premium provides a small buffer.

Capital gains or losses will only be crystallized upon selling the stock. Until then, they would be considered paper losses.

Selling covered calls comes with opportunity risk, wherein the underlying stock price rises significantly higher than your strike price. In this case, the profits would have been higher if you had sold your shares directly on the market.

Payoff Diagram (Risk Profile)

Here is the typical profit/loss profile of a covered call. Again, note that the maximum profit is capped at where the short call's strike price is.

Investment Type

When using a covered call strategy, the trader becomes a seller.

As mentioned earlier, covered calls are suitable in stable or moderately rising markets where you do not expect significant price movement in either direction.

Next, we'll look at how to select a call option to sell.

Setup Steps / Strike Selection

To sell a covered call, you must own the Stock. Since one option equals 100 shares of the underlying security, you'll need to have at least 100 shares of the stock or ETF on which you want to write a covered call.

You'll also need to choose a Strike Price. This is a price where you are comfortable selling your shares.

You'll also need to determine the Expiration Date. My preference is typically 30 days or more, to allow time for trade adjustments.

Finally, you'll need to analyze the premiums. Factors that affect premiums include the stock price, strike price, time to expiration, volatility, interest rates, dividends, and supply and demand.

Next, we'll look at how to search for covered calls on an underlying you already own.

Covered Call Example On an Underlying You Already Own

Here's a sample trade using data from Barchart to help you understand how a covered call works.

Imagine you own 100 shares of the SPY ETF.

Today, the SPY trades for $529.44; your cost basis is $523.30 per share, and you decide to write a covered call on them.

Entering the Trade

To find covered calls on the SPY with Barchart, go to the SPY's Quote Overview page and look under the OPTIONS category on the left.

For this particular trade, click on Covered Call, and you'll be presented with a list of options based on prices that may suit the trade. This is called the option chain.

The first step is to look for your preferred strike price and expiration date. Barchart provides option chains for different expiration dates, which you can change in the expiration date dropdown.

For my example below, I selected June 21, 2024 as the monthly expiration date, which will expire 30 to 45 days from the time of writing.

Once there, I can now select from various strike prices. The rule of thumb is to select a price level where you are comfortable selling the stock.

So, let's say you're comfortable selling your 100 SPY shares at $538.

On that row, you can find critical information about your potential trade, including the premium you can sell the option for (Bid), Implied Volatility (IV), Delta, OTM Probability, and Potential Return.

The nice thing about the results page is that you can sort the selection using any headings.

Usually, the goal of a covered call strategy is for the option to expire out of the money, or OTM for short. If that's the case, you'll want to find an option with a high chance of expiring OTM.

However, there are instances where the opposite is true. Let's say you are happy to have your shares called away. In this case, your main goal is for your option to get assigned at a specific price so you can earn from selling the stock and the premium collected. If so, you'd need to short a call with a lower OTM probability.

To sort OTM probabilities from higher to lower or vice versa, click on the column heading “OTM Prob.” You can do this for every heading in the results table.

Traders who want to keep their shares often prefer selling covered calls with at least a 70% or more chance of expiring OTM.

As we can see, a $538-strike short call has a 74.75% chance of expiring OTM—decent odds for any trader.

According to the Bid column, you can immediately sell a call for $2.41 per share or $241 for the contract. This represents the total premium you receive upon initiating the trade.

And so, we have all the required trade details:

Now, let's examine two ways this trade could play out.

Exiting the Trade

Fast-forward to the expiration date. Covered calls have three potential outcomes: either they are at the money (ATM) or out of the money (ATM) and expire worthless, or they expire in the money (ITM) and get assigned.

Here they are broken down:

Scenario 1: Covered Call Expires At or Out of the Money

Let's say that SPY trades for $536 a share, below the $538 strike price at expiration. This means the option expires out of the money, and the buyer has no incentive to exercise the contract. It expires worthless and unassigned.

In this case, you get to keep your original 100 shares of SPY and the $241 in premium collected. This is your maximum profit for that trade; as long as you keep writing covered calls and they expire worthless, your total profit can go even higher.

Overall, this is the ideal scenario to keep your shares and write more covered calls.

Scenario 2: Covered Call Expires In the Money and Shares Get Assigned

On the other hand, let's say that SPY trades at $545 on or before June 21. In this case, the call option will be in the money and will be assigned, meaning you'll be selling your 100 SPY shares at the $538 strike per share.

You will receive $53,800 for the trade, representing a $14.70 per share profit, which is the difference between your $538 strike and the underlying price at entry of $523.30.

Additionally, you get to keep the $241 premium, making your total profit $1,711 before trading fees or taxes.

Profit/Loss Per Price Point

Selling covered calls does not incur losses unless you sell the underlying stock. Also, buyers don't usually exercise call options when the stock trades below the strike price.

But, for illustrative purposes, here's a table of this trade's potential losses and gains across different price points.

As you can see, as the SPY moves up or down, you'll also have a change in your P/L, just as you would if you didn't sell the call option.

The only difference is that by selling the covered call, you earn $270 at the expense of limiting any further gains if the stock moves above your $538 strike price.

Next, we'll look at how to use Barchart''s Covered Call Screener to find opportunities.

Covered Call Screener

What if you want to screen the market for covered call opportunities? With Barchart's Covered Call Screener, you can search for potential trades while getting access to all the information you need. Furthermore, Barchart provides customizability through several screening options and filters.

To access the Options Screener feature, click on the Options tab, then select the Covered Calls Screener page.

You'll be brought to the results page first, which shows likely underlying stocks for the covered call strategy. Now, click on the Set Filters tab to start customizing your trade.

From there, you can select from dozens of metrics and information filters to find the best-covered call trades that match your preferences. Anything you need to tailor-fit your covered call trade is at your fingertips.

Additionally, you have full access to data filters for the underlying assets. These filters are found on the drop-down menu under the grouping called Underlying Asset Filters.

Next, we'll talk a little about the Options Greeks.

Other Financial Metrics to Look For: Delta

Delta is an option Greek that estimates how much an option premium's value will change in proportion to a $1 change in the underlying security.

Delta is expressed from 0 to 1 for long calls and -1 to 0 for short calls.

Delta can also measure the probability of an option contract expiring in or out of the money, and Barchart offers the data in the options chain.

For covered calls, the delta is inversely proportional to the probability of expiring worthless.

However, the delta and OTM probability do not perfectly match. This is because delta and OTM probability are estimates and calculated slightly differently.

For example, a Delta of -0.30 translates to a 70% probability of the call option expiring worthless, while on the screener, the OTM probability lists it as 74.75%.

Ultimately, which metric you choose to guide your trading is up to you.

Pros & Cons of Selling Covered Calls

Let's discuss some of the pros and cons of covered calls:

Selling covered calls has many advantages, including generating additional income through premiums. It provides a small buffer against downside risk and is suitable in moderately bullish market outlooks.

However, disadvantages include limited upside potential, lack of protection from significant stock price declines, and tax implications if the option is assigned. Depending on the holding period of the underlying stock, assigned covered calls may result in short- or long-term capital gains on the stock itself if you sell it for a higher price than you paid.

Conclusion

The covered call strategy is a powerful tool for generating additional income from your stock holdings while limiting potential gains. Check out resources like Barchart's Options Learning Center to strengthen your understanding of options trading and maximize your strategy's effectiveness.