Selling Calls: a Game-Changing approach to trading.

For every 100 shares of stock that you own, you can sell 1 Call Option Contract. This equation scales nicely; if you own 3000 shares of a stock then you can sell 30 Calls.

The great part about selling options is that you’re constantly building your cash position and/or account value regardless of the movements in share price and your predictive accuracy. Executing your trades at any reasonable strike price is more profitable than sitting out or deviating from your strategy.

You’ll develop preferences as you make money. You’ll also develop preferences as you miss out on profit occasionally. The important part here is that you learn from your experience in the market and make money while you make mistakes. Personally, I love selling both calls and puts that have zero intrinsic value and are composed of 100% premium. I like holding shares and selling options that are 3-5% higher than the current share price that expire within 7 days.

Worthless Contracts

This is our bread and butter. Contracts that expire “out of the money” are worthless ($0.00). The intrinsic value of these contracts is zero and the premium at expiration also goes to zero.

If you bought that contract and held it until expiration, the amount that you bought it for is a total loss.

If you sold that contract, the amount that you sold the contract for is totally yours to keep. Buy champagne or build equity on top of shares in your account - you choose! 

More on this to come… but our strategy is to let equity in shares grow while pocketing premiums from selling Call contracts.

If AAPL closes at $122.12 at 4pm on Friday and you sold 15 of the $123 Call contracts for $1.51 each… you just pocketed $2265 this week. 

Of course, you’ll set yourself up for a similar profit next week too.

Why do we only sell option contracts that expire this week? The depreciation curve is steepest for these contracts. So sellers are at an advantage.

Call Contracts that Expire “in the money”

AAPL share price at market close on Friday at 4pm is $122.12

If you had sold the $120 Call listed at $3.20 for $320 then you will have to factor the intrinsic value into your weekly calculation of profit/loss.

Remember that the $120 Call had an intrinsic value of $212 and a premium of $108. You pocket the premium regardless. You pay the intrinsic value of this contract from the profit on your shares. So $212 intrinsic value minus $108 pocketed premium nets your account $104 dollars in missed profit opportunity. This is a loss of $104 dollars from your cash position. 

Depending on where AAPL share price was when you sold it, your account may have still increased in total value. This scenario is rather easy to mentally manage… “Hey at least I made money!” But our cash position is so important to making this approach profitable so we’ll use strategy to recoup that missed profit in the next week.

Track both profit and missed profit every week on Friday using a simple spreadsheet.


FYI: Selling “Naked” Calls means selling calls without owning shares to cover against increases in share price. Because share prices can technically go up infinitely, your risk is infinite if you sell naked calls. So selling covered calls enables you to more conservatively manage risk.

Strategic Selection of Strike Price

Give yourself the best probability to win by evaluating companies and share prices using the three categories of variables described in the “Analysis” Section. 

As a trader, you choose a strike price that fits your beliefs and opinions on share price. In general, the more bullish your predictions for price, the higher strike price you should sell.

Analyze share price using FA, TA, and Sentiment. Develop a Bullish, Neutral, or Bearish weekly opinion. Sell options on Friday between 3:30 and 3:50pm EST using your opinion as a guide.

Premiums are always highest near the current share price. The option contract just above share price has the highest premium with zero intrinsic value.

You can use discretion to take advantage of this high premium. This is helpful when you are first buying into a position or maintain a bearish opinion on share price.

Use your discretion to choose a very high strike price if you’re bullish on this week’s price movement. This way, if you’re wrong you still add cash to your position. If you are correct then your position has more room to grow equity. The drawback is that you have less downside protection/ less cash to add into your account value in the event of flat or ranging (horizontal/sideways) price movement. 

Strike Price Selection Guide

Bullish 10% or greater above current share price

Neutral, Not Sure, Default 3% above current share price

Bearish or Buying into a new position 0% (Sell Call nearest current share price)

Execute your Trade

This is the easy part. You can run through these logistics on your broker’s platform for practice.

  1. Use a limit order to buy any multiple of 100 shares of the company that you choose.

  2. Your limit order executes making you the proud owner of those shares.

  3. Immediately go to the options section of your trading platform and Sell Calls against every one of your shares at the strike price that you’ve strategically chosen. Expiration date will be Friday of the current week.

After Execution of this trade, you will need to manage this position ONLY on Friday around 3:40 to 3:50PM. Here’s a guide for every scenario.

Manage your Trade

Share Price Moves Lower

You’re holding some multiple of 100 shares to execute this strategy. When you see any drop in share price (big or little) then your account value will go down. This is stressful for beginners & experienced traders alike.

Know that because you sold calls, your cash position is getting bigger & better. You still have the same number of shares that you did when the market placed a higher value on them. The shares/ your asset is still intact.

The value for which you sold your call contract is yours in cash! Now repeat selling calls for next Friday.

Share Price moves lower by 10% or more 

In the inevitable event of a major sell off, you may choose to buy back your sold calls and sell calls for a lower strike price to more aggressively build your cash position. This takes discretion. Consider the three categories of variables in the “Why Markets Move” section.

By buying back your calls and selling a lower strike price one of two things will happen. 

1) You build your cash position even more aggressively (good!) 

2) You reduce your cash position because you’re incorrect and the share price moves up again (not good)

Share Price Moves Higher

You’ve already sold a call option that’s out of the money according to this strategy, If share price moves toward your strike price, GREAT! That’s equity in your account. 

If the share price continues to move above your strike price… The first thing to do is relax. Markets do not move in straight lines. The price will go up and down during your weekly trades. In this event, your equity in shares is increasing AND your position for making a profit from selling calls is becoming more secure.

You’ll see a “break-even” share price on your Sold Call. This is the number that the share price can reach on Friday at 4pm and you will not miss out on any share equity. At break-even you will not add any cash in addition to your share equity. Above that number you will miss out on share equity. Your cash position will reduce itself to cover your stock position.

Share price moves greater than 5% above your strike price 

While your account value increases in this scenario, you’re taking money out of your cash position/spending money/trading profit.

In the inevitable event of a major run up in share price, you may choose to buy back your sold calls and sell calls for a higher strike price to capture as much share equity as possible. This takes discretion. Consider the three categories of variables in the “Why Markets Move” section.

By buying back your sold calls and selling at a higher strike price one of three things will happen. 

1) You build your share equity inline with the market gain. It’s like you never had sold calls at all. (good!) 

2) You take a small amount of your cash position to buy back your calls and sell higher calls. Log this small decrease in cash and make it up next week. (pretty good)

2) Share price moves down again and your change in option contract strike price causes you your cash position to decrease. (not good)


Selling Calls: Example Trade Setup

This is a real trade setup using numbers accurate on date of writing: December 5, 2020. You’ll see exactly why this is an appealing setup:

Assume that I reviewed the fundamentals, technicals, and market sentiment for Apple Inc. and as a result I’m deciding to take a position in AAPL.

AAPL’s share price is currently $122.12

AAPL $125 Call with December 11th (current week) expiration date can be bought or sold for $0.84 or $84

First I develop my position size and limit price: 900 shares of AAPL for $122.05 for a total of $109,845.

Then I project the option premium profit available if I sell calls against my 900 shares. $125 call contracts are $84 each and I can sell 9 of them (recall that one contract is for 100 shares).

Possible Outcomes (reminder that these are real numbers from December 5, 2020)

Friday at 4pm when the option contract expires: one of the following two scenarios will occur.

1. AAPL closes below $125

I will own 900 shares of AAPL. Share price can go down and lower my account value. Share price can go up to $125 (but not over) and increase my account value.

AND

I will profit $756 in cash by selling those 9 call contracts. 

AND

Next Friday I plan to execute a similar trade and pocket something in the neighborhood of $750 again.

2. AAPL closes above $125

My shares have increased in value by $2655.

AND

I keep the premium of $756 from selling those 9 calls. My net increase in account value for this week is $3411. I consider maintaining the position and selling calls for next Friday.

AND

I’ll need to calculate the missed profit and evaluate whether I’d like to maintain this position or exit the trade with +$3411 on Friday just before market close.