Every month I buy stocks to sell covered calls on them.
Last month I made a couple hundred dollars writing calls on a steel company called Steel Dynamics (STLD) . I sold an in-the-money call at the beginning of the option cycle for May, bought it back once when it dipped (netting $150). A few days later on the upswing I sold it again for the original price. I let that one run to expiration and got called out over the weekend, netting another $200.
This morning I bought 300 shares of AK Steel holdings (AK) for 33.75 and sold 3 June 32.50 calls for 2.75 each. This will net $450 (3x150) if I get called out as planned, maybe a little more if I get the chance to buy it back on a dip and re-sell it.
This works out to about 4.0% a on $10,125 in play for the month, less transaction fees (about $35 total). Not bad for a moderate risk.
I have had the best returns in the last year or so on steel product companies, and the copper company Souther Peru (PCU). Not sexy or cutting edge, but for some reason, steel companies have had good, predictable returns on covered calls.
I am basically playing the time-decay game, using selling in-the-money near options and planning to get called out. I have lost a few times, mostly when I go against my general guidelines, but I average 2-3% per month, and never a catastrophic loss (almost though!). I set up these trades at the beginning of the monthly cycle (the Monday following the 3rd Friday of the month). Then I monitor them to see if there is a buy back opportunity. It takes discipline to keep from buying back prematurely.
If my options close out of the money, then I decide whether to write a call for the next month or liquidate the position and try something else. In these cases I usually break even.
I avoid high tech, pharma, companies that depend on interest rates (like lenders of any kind), companies that depend on government contracts, companies that are announcing earning before the options I want to write will expire, and companies with a PE over 35 or so. I also look at the 6 month Bollinger bands and 120 day moving averages. I am not a technical trading expert, but I look at these indicators to get a general view. If an otherwise great stock is bumping up against its upper band then I am very wary.
The times I have lost money have been when I violated one of these basics.
