Markets: Any market that trades equity options. Defensive stocks typically have a lower return than growth stocks however defensive stocks often have higher dividend yield so balanced view needs to be taken.
US Markets usually have a higher return than other markets, due to the sheer size of the market.
Duration of Trade: Typically 4 to 6 weeks
Expected Gross Return: 2% to 5% of stock capital per trade. For example, trading 1000 shares trading at $50 per share, i.e. $50k capital value, the income would typically be $1500 to $2500 for a six week trade.
Where to Use: Typically used in periods of sideways or moderate price movement, although returns will be higher during periods of volatility. The trade entry point is important but not as important as day-trading, where a small difference in entry price can make a significant to the trade outcome.
Where Not to Use: Care should be taken using this strategy over the ex-dividend period as the call option may be exercised prior to the ex-dividend date and hence the dividend would not be received.
Periods of high volatility in a Bull Market will usually result in higher rental premiums but this may increase the possibility that the stock price will be higher at the contract expiry date. This should not necessarily stop traders from using this strategy as each time the option is exercised, the Trader is in fact “locking in profits”.
Locking in small Profits frequently is in fact one of the significant benefits of this strategy. For example, consider a stock that is trading at $50 and you write a covered call on this for $2 premium at a strike price of $52. Assume the stock price rises rapidly to $56 and you are therefore asked to sell your shares. You receive a “real” profit of $2 per share on the sale of the stock.
The person who owns the call option will have a $4 per share “paper” profit. But in a volatile period this paper profit can easily vanish quickly as the stock price falls again. By using this strategy you are being forced to take real profits regularly.