Covered Calls 1 OTM Trading Rules

The Strategy

Buy 100 shares, sell a call 1 week out 1 strike out of the money (OTM). This is an very short term strategy.

What to Trade

Liquid stocks and ETFs with liquid options in a sideways to upwards trend. 

ONLY TRADE STOCKS AND ETF's THAT ONE IS WILLING TO KEEP FOR THE LONG RUN.

Use fundamental and technical analysis to establish your boundaries. Write down what the exit strategy is going to be and stick to it.

Entry

Some brokers allow to buy write in a single trade.  

The call option to sell is 1 to 2 weeks out, 1 strike out of the money.  Desired return is 1% per week

Management 

When the trade is filled, place a closing order to buy back the short option for 2 cents or less. Most US brokers don't charge commissions for it

Exits

There are different cases:

• the stock trades above the short call strike price => get called out. This is a home run.
• The option is bought back for 2 cents. Sell another call 7-14 days out and try to get another 1% return. Some times it takes more then 1 or 2 weeks, then try to find something up to 5 weeks. The sold option always must be above the stock purchase price.