Setting Up a Covered Call Trade: Step-by-Step Process + New Trade Video – February 17, 2025
Establishing our covered call trades require a sequential process including stock selection, option selection and position management. This article will analyze the procedures using a real-life example with Tenet Healthcare Corp. (NYSE: THC).
Stock selection using our BCI Premium Stock Report as the resource on 9/20/2024
- Passed BCI’s rigorous fundamental, technical and common-sense screens
- In medical industry segment ranked “A”
- Excellent mean analyst rating of 1.43
- On balance volume bullish
- On our stock list for 16 weeks
Option-chain on 9/20/2024 (preliminary view, will change when ready to trade)
- Consider the OTM $170.00 call strike in normal to bull market conditions
- Consider the ITM $160.00 call strike in volatile and bear market conditions
- The $170.00 strike will be used in this article
Broker screenshot of share purchase and option sale
- 100 x THC purchased at $165.44
- Sell-to-open 1 x 10/18/2024 $170.00 call at $380.00/contract
- Notice the slight changes from the pre-trade option-chain
- Not shown is the 20% BTC/GTC limit order of $0.76, which is 20% of $3.80 and protects against share price decline
Initial trade calculations with the BCI Trade Management Calculator
- 29-day trade if taken through contract expiration (red circle)
- 2.30% initial time-value return, 28.91% annualized (brown cells)
- Upside potential of 2.76%, if THC moves up to, or beyond the $170.00 strike at expiration (purple cell)
- Possibility of a 5.06%, 29-day return
Discussion
The crafting of our covered call trades incorporates stock selection, option selection and position management. Successful execution of these trades is facilitated by following a blueprint like the one analyzed in this publication.
Author: Alan Ellman