Hedge Trading With Covered Call Options

Updated on November 19, 2018
m-a-w-g profile image

Chris has been trading for over a decade and enjoys the time it allows him to spend time with friends, family and life in general.

Hedge Trading

Hedge trading is a way of offsetting the risk of the price of a stock moving in an unfavorable direction. A common options trading method is to purchase a number of stocks and do a short call using the underlying stock as collateral.


Looking for Stocks

When I am looking for stocks sell calls on, I am looking for a stock that I think will either be flat or have slow gains. I do sell them covered, so I already own the underlying stock that I will be selling calls on. This helps protect me from having to purchase the stocks. If there is an upwards gap, I don't want to have to purchase the stocks to fill the contract.

GE is currently a great stock for this because it most likely will continue downward for awhile, and I can continue to sell the call options and make a premium income while waiting for it to raise to its former glory.

My overall strategy is to purchase stocks that are flat or slow rising and sell calls that I think will be just out-of-the money at expiration. I want these stocks to be somewhat close to the strike price.

One important part of this that I have not seen anyone mention before is that you want to be able to afford at least a couple hundred. For most stocks, I look for at least 500 shares. This will offset the increased cost if the option expires in-the-money and you are assigned. TD Ameritrade has a $19.99 for assignments and exercising contracts. I also look for options that expire weekly; this means that they are traded much more and have a high volume.

GE: An Example

At the time of this writing (11/16/2018) GE had plummeted to $8.02 ,and was trading in the high $7 range for a bit during the day. Personally, I thought it was a good time to jump in, even though some analysts were predicting a low of $5.00. I decided my entry point would be $8.115 for 200 shares. CEO Larry Culp is taking action and consolidating and making movements to improve GE with time. In a few years, if improvements continue, I could see GE going up to the $20's again. Below are several charts using Ichimoku's Cloud.

If you look at the clouds you will notice for the most part they are quite thin, this is not the only thing to look for but an indicator.
If you look at the clouds you will notice for the most part they are quite thin, this is not the only thing to look for but an indicator.

Down $19 on GE Stock

As you can see on the chart, with the stock I am down $19.00 on GE stock. How I help offset this was I sold two short calls on GE with a strike price of $8.50 and an bid of 10¢. These options expired out-of-the money and I made $20.00 from hedging this trade. Currently, I have an unrealized gain of $1.00 between the underlying price of GE and the premium I collected from the two out-of-the money options I sold.

I will continue doing this because the stock may very well dip to $5.00 by the time all is said and done. And I want to protect any gain potential that I may have, but I see GE as being a great buy in the long run.

Looking at the Option Chain

One caution for every trader is not to over-trade. The only guarantee with over trading is that you will pay more in transaction fees. Commission and fees are the bane of all traders, so limit and control this as much as possible to help your bottom line.

If you look at the above options chain, I am focusing on $8.50 for the next couple of weeks. Each week this is something that I review and decide on what strike price I want to focus on. I don't think GE will hit $8.50 for at least a few weeks since it has been trading between $7.80 and $8.20 lately.

For the expiration date of 11/23/2018 the ask is 9¢. The 11/30/2018 $8.50 strike price is 23¢. This is the better purchase, because it is more than double the ask price for the 23rd of November. The short call for 12/7/2018 is 30¢, which is more than 300% over the 23rds. I will not sell at this expiration date because for the additional couple of dollars, I do not want to have to hold this liability for three weeks. I will sell two options for 11/30/2018 for the 23¢ at a strike price of $8.50.

Breaking the Option Down

The premium from selling the two call options will be $46.00. If the option expires out of the money, that is all profit and I decide on the next short call to make. If GE hits $8.50 or more than I still keep the $46.00, and I have to sell my 200 shares at $8.50 a share. I purchased my shares for $1,623 and it was commission free.

If GE is in-the-money at expiration then here is what happens:

  • I make $46 from the premium
  • I Sell 200 shares at $8.50 = $1,700
  • I pay $19.99 because I was assigned
  • So with last week's options and this week's I would profit $113.01

Now I plan on continuing to only collect a premium, but I want to make sure that the miscellaneous fees that brokerages charge don't make me negative on my trades.

What's Next

For this account, I will continue to collect the premiums and funds until I have enough to purchase cover a short put if it is assigned. I will find a stock that meets my criteria, and then do a short put. If the put is out-of-the money, then I will complete for the next week and keep the premium and if the short put is in-the-money then I purchased my stocks at a discount.

After that, I will do short calls with that stock the same as I am doing with GE. If I am assigned, then I make money and if I am out-of-the money then I collect the premium. This is a rather safe method for hedging my stocks, and within six months I should be making several hundred dollars a week from this account.

Disclaimer

Investors should be cautious about any and all stock recommendations and should consider the source of any advice on stock selection. Various factors, including but not limited to personal or corporate ownership, may influence or factor stock analysis or opinion.

All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is no guarantee of future price appreciation.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

Questions & Answers

    © 2018 Chris Andrews

    Comments

      0 of 8192 characters used
      Post Comment

      No comments yet.

      working

      This website uses cookies

      As a user in the EEA, your approval is needed on a few things. To provide a better website experience, toughnickel.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

      For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://toughnickel.com/privacy-policy#gdpr

      Show Details
      Necessary
      HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
      LoginThis is necessary to sign in to the HubPages Service.
      Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
      AkismetThis is used to detect comment spam. (Privacy Policy)
      HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
      HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
      Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
      CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
      Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
      Features
      Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
      Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
      Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
      Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
      Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
      VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
      PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
      Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
      MavenThis supports the Maven widget and search functionality. (Privacy Policy)
      Marketing
      Google AdSenseThis is an ad network. (Privacy Policy)
      Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
      Index ExchangeThis is an ad network. (Privacy Policy)
      SovrnThis is an ad network. (Privacy Policy)
      Facebook AdsThis is an ad network. (Privacy Policy)
      Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
      AppNexusThis is an ad network. (Privacy Policy)
      OpenxThis is an ad network. (Privacy Policy)
      Rubicon ProjectThis is an ad network. (Privacy Policy)
      TripleLiftThis is an ad network. (Privacy Policy)
      Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
      Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
      Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
      Statistics
      Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
      ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
      Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
      ClickscoThis is a data management platform studying reader behavior (Privacy Policy)