Writing covered calls is based primarily on well – selling call options. We know writing call options is one of the many option trading strategies that can generate a nice monthly income; but what about the stock? The options we sell are based on the stock we bought in the first place.
So how do you pick the right stock for this option investing strategy?
Do your homework.
Many people tend to pick their stocks based upon what a friend or relative suggested to them. Or maybe they pick the hot stock that is being talked about on the nightly news. There are many things in life where having a recommendation from someone you know can make things easier.
Stock picking should not be one of them.
If you are content with the money managers and brokerages investing your money for you this may be a fine strategy. However, taking control of your own financial future is always in your best interest.
Location, location, location.
No we’re not talking about real estate. But the price of a stock, or more importantly the history of a stock’s price is worth paying attention to.
Many people who value technical analysis, or analyzing a stock based on the chart of its price, are familiar with this thought process.
If you are going to sell covered calls then you typically want a stock that is slowly trending upwards or at the very least, moving sideways.
The reason we say slowly moving up is that you don’t want a stock that makes a meteoric rise only to make an astounding thud as the bottom falls out of the stock.
If we pay attention to the stock that we are writing calls on, we don’t mind if it drops in price as long as we have an exit strategy.
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