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Help for the Covered Call Analysis Program

About Covered Calls
How the Covered Call Analysis Program Helps You
The Header Line For each Stock
The Columns for each Stock
Call Symbol
Days Left
LastPrice/Bid Price
Volume/Open interest
% Prob of not being called
% Ann Return from option
Net Take pre fees

About Covered Calls

The easiest, commonest, and safest way to Double Your Yield is to sell calls on the stocks you bought for income. That is called a "covered call" because the risk of the call is eliminated by owning the stock. Whenever we say 'stock' here, we really mean any underlying security that has options, including Exchange Traded Funds (ETFs) etc.

When you sell a call on a stock, you agree to sell a round lot of stock to the buyer of the call at the "strike price" on demand, until the "expiration date". For this privilege he pays you a "premium". Obviously, he will only exercise this right if the market price of the stock is higher than the strike price, because why should he buy it from you at the strike price when he could buy it cheaper from the market? Your broker will act as an escrow agent to hold the stakes and execute any transfers.

(Note that option prices are always quoted for a single option, but you always deal with a contract of 100 options, just as a round lot of a stock has 100 shares. Thus if you sell a contract of an option whose bid price is $1, you will bring in $100.)

So, you will always sell a call whose strike is higher than the current market price, so that it is "out of the money", or "OTM". As long as the stock's market price remains under the strike price, you get to keep the stock, and also keep the premium as your additional profit on the stock.

Any time before expiration, if the market price exceeds the strike price, the stock may be called at the strike price. You don't have to buy the stock at the higher market price, because you already own the stock, so your broker just turns it over. If you bought the stock at a lower price, you also have a profit on the sale. Of course, if you had bought the stock at a higher price, you actualize the potential loss.

If the stock rises enough that the call expires In The Money, there are several ways to handle it:

  1. You can do nothing, and your broker will deliver your stock to the buyer and deposit the proceeds (the strike price) into your account.
  2. If you really wanted to keep the stock, you could turn around and immediately buy it back at the market price, probably very close to what you just sold it for, so that would be nearly a wash, except for the additional expense of the broker's transaction fee. If the stock was called just before the exdiv date, the stock price will briefly drop by the amount of the dividend paid, to the advantage of the re-buyer.
  3. You can buy back the call for the difference between the strike price and market price (ie, at a loss), pay a small transaction fee, and retain your stock.

The good part of all this, is that the annualized premiums you take in from the calls may exceed the dividends you originally bought the stock for, at minimal extra risk. What you have given up is the potential profit from a price spurt so rapid that you can't buy the stock back at a wash.

Of course, the risk that the stock will go down is unaffected by selling the call, but the more premiums you collect, the lower your effective cost for the stock.

How the Covered Call Analysis Program Helps You

A typical stock has many calls at many strike prices and with many expiration dates. A typical Yahoo options page may show so many options as to be overwhelming. How do you know what return each will provide? How do you know how likely it is to be called? How do you know how easy it will be for your broker to do the trade? How do you protect yourself from losing the dividend if the stock is called on the exDividend date?

That's what this program is for!

It looks at every unhedged long stock in your DYY portfolio and calculates and displays the data you need to know for each of the calls on those stocks.

First, it culls the options shown on a typical Yahoo options page: Obviously, it shows no Puts. It shows only Out Of The Money calls. Because optimal calls are rarely found with less than 2 weeks or more than 17 weeks to run (as explained below), it excludes those outside this range. It excludes calls with premium bids less than 2 cents, as not worth the trouble. It excludes those predicted to show a net loss. It shows the months for which dividends are paid, and how much to expect the dividend to be.
And then, on each of the remaining calls, it does the calculations shown below.

The Header Line For each Stock

The header line for each stock first displays the stock symbol and the number of shares you own, as listed in your DYY portfolio. The stock symbol is an active hyperlink. Clicking on it will take your browser directly to the stock's main page on Yahoo.

The second line shows the last price of the stock, as of the time you ran the program, and the % dividend, ie: last year's dividend payments divided by the current stock price x 100.

The third line gives more information about the dividend. Dividends are normally paid each quarter, ie, every 3 months, so there are three possible schedules:(Jan, Apr, Jul, Oct), (Feb, May,Aug, Nov), or (Mar, Jun, Sep, Dec). Each company chooses one of these schedules and which day during the month it will pay the dividend.

The 3-month dividend is paid to whoever is the owner of record on the "Ex-Dividend" date that month. If the call is executed just before that ex-div date, you will lose 3 months of dividends, and the caller will get it instead. So it is very important to be aware of these ex-div dates when you are selling covered calls on dividend paying stocks.

So on this line we show which schedule the company is on, and the dollar amount of the last quarterly dividend payment, which is an indication of what the next payment might be, though the company can change the amount at will.

More information on this important point will be given below, when we discuss the "ExDiv?" column.

The Columns for each Stock

Following the header for each stock, there is a table with 9 columns and a row for each potentially suitable call. If no potentially suitable calls are found, nothing is displayed but the title row.

We say "potentially suitable call" because some of them may be good strategies, and many may be bad. The columns give you the data you need to select the best call to sell, or possibly to sell none, if a good one is not available.

Call Symbol

Column 1 shows the official OCC option symbol, as used by Yahoo. It is a live hyperlink, and clicking it will direct your browser to the option's page on the Yahoo site.

The parts of the OCC option symbol are: Stock symbol + Expiration Year(yy)+ Expiration Month(mm)+ Expiration Day(dd) + Call/Put Indicator (C or P) + Strike price.
Note that the "20" part of the year is dropped, so that Mar. 23, 2013 becomes 130323.
The Strike price is multiplied by 1000 and padded with 0s to 8 places, so that a price if 21.5 would be shown as 00021500.

Thus "MSFT130420C00028000" is a Call on Microsoft expiring on 4/20/2013 with a strike of 28.


Column 2 shows the strike price. Yes, it's also there in the call symbol, but for rapid scanning, it's not always easy to locate it and figure where the decimal point is, so we give it its own column for ease of use. Below it we show the distance, in dollars, that the call is out of the money.

Days Left

Column 3 shows the number of calendar days the call has left to to run before it expires. The number of actual trading days will be approximately 5/7 of that. So 21 calendar days means 15 trading days till expiration.

Monthly options all expire on the third Saturday of the month, so that the last trading day is the Friday before the third Saturday. Note that this is not necessarily the same as the third Friday. The expiration date used in the option symbol is the Saturday, but in other venues the Friday date is sometimes used.

Some stocks also have weekly options, with a last trading date on Friday of each week.

LastPrice/Bid Price

Column 4 show the Last price at which the option was traded, and the last bid price. Typically there is a spread between bid and asked prices, with the bid price lower and the asked price higher than the last price. Sometimes you will see this rule broken, and that usually indicates a time lag between the last trade and the bids.

When you are selling, you will typically get the lower bid price, though you can specify reasonable stop orders to your broker.

An option's price has 2 components - an Intrinsic Value, and a Time Premium.

Intrinsic Value (IV) represents the amount a buyer would make at expiration or by exercising the option at the strike price and immediately reselling it at the market price. For a call buyer, if the market price is below the strike price, (the call is "out of the money") he would lose money on the trade, so a rational trader would never do it, so the IV would be zero. If the market price is above the strike price, (the call is "in the money") his profit would be the difference between the market and strike prices, and that would be the IV. Typically bid/ask spread and transaction costs are ignored in this calculation. And obviously, the buyer's gain is the sellers loss. The actual trades need not be made, and the accounts are usually settled in cash.

Time Premium (TP) is the amount the option trades at above the IV. But, why would anyone pay more than the Intrinsic Value to buy a call? In particular, why would they pay more than zero to buy an OTM call? It's because there is a chance the stock may go up and their call will end up ITM. If they are bullish on the stock, an OTM call provides far more upside leverage than buying the stock itself, and limits the downside risk to the modest premium of the call. However, bullishness or bearishness is a delusion. It is rarely possible to know when or whether a stock will go up or down. Even the pundits and technicians do no better than chance in their predictions.

To a first approximation, stock movements are a 'random walk', and the probability (chance) that stock price moves enough that the call moves from OTM to ITM depends on 3 factors: Time left to run, Distance from the money, and Volatility of the stock. The premium of a call on that stock reflects traders' perceptions of that probability, plus "Irrational Exuberance".

  1. Time left to run:
    The longer a call has to run, the greater the chance that the stock price will move far enough that the option is in the money, therefore the option is worth more and the premium will be greater for longer options. But the probability of moving a given distance in a given time, and therefore the premium, is not proportional to the time, but is actually fairly close to the mathematical prediction for a random walk, ie, apx. proportional to the square root of the time.
    Thus a 4 month option will not have 4 times the premium of a one month option, but closer to 2 times the premium, since 2 is the square root of 4. The return on the 4-month option would therefore be only half the return on 4 sequential 1-month options. And this is a general rule! Most of the profit from selling options comes near the end of the life of the option, so you maximize your return by buying shorter options.
  2. Distance from the money:
    The same random walk rule applies to the distance between the market and strike prices, but the premium decay is even faster than the square root.
  3. Volatility of the stock:
    How far a random walk moves depends very strongly on the average step size, and with stocks that is measured by volatility. The best measure of volatility , as perceived by traders, is the premium of a 1-month option At The Money. This is usually 1-3% of the stock price, but for volatile stocks might be as high as 10%.
  4. Irrational Exuberance
    Traders sometimes becime fixated on a stock, and bid up premiums beyond what the above parameters would indicate. Sometimes an asked premium of a far OTM option will remain at 1-2% of the stock price right up until expiration destroys the final hope of a profit. This only becomes an issue if you want to cover the short call position by buying at the market, though that should rarely be necessary.

Volume/Open interest

The numbers in Column 5 give an indication of how easy it will be to trade the call. An illiquid call may also have an excessive bid/ask spread.

% Probability of not being called

Column 6 attempts to give some way of predicting how the stock will move, which, of course, can't be done. What we do is look at the past 3 years of daily closes and assume that the next several weeks will be similar. We picked 3 years as a compromise: long enough to give decent statistics, but not so far back that the market's condition is radically different from today.

If the call has N days to run, we calculate the change over all N day spans in the past 3 years, and generate a cumulative distribution function. No theoretical probability function is a good fit to stock data, so we use the actual observed distribution. This can give rise to apparent glitches, so sometimes you may find that a longer call has a lower probability than a shorter one, a theoretical impossibility. This will remind you not to put too much faith in this estimate. And sudden extreme moves can occur at any time.

The number will usually be greater than 50%, since the chances of going up or down are usually approximately equal.


Column 7 shows whether an ex-dividend date falls during the life of a call. If your stock is called before that date, you will lose the quarterly dividend. And there are 'dividend trolls' who make a practice of buying calls in ex-div months just to collect the dividends, so you must be aware of the danger.

If there is no ex-div date for the call, this column says 'No', and that is not a consideration. Otherwise it says 'Yes', and lists the dollar amount of the expected (ie, the last) quarterly dividend which you might lose. If the possibly lost dividend is greater than the premium brought in, the call will not be displayed at all.

Just because it's an ex-div month doesn't mean you can't sell a covered call. You can protect yourself in several ways.

  1. If the premium is greater than the dividend payment, you will be ahead even if the stock is called. And you may repurchase the stock if it hasn't moved too far above the strike. Strictly speaking, if you sell a call every month, even a premium of 1/3 the dividend would cover the loss of the dividend once every 3 months, though that would be a lot of effort to no purpose.
  2. If the stock has moved so high when called that repurchasing it would involve a significant loss, you might sell naked puts at your original strike price, take in a premium each month, and buy the stock back at the same price you sold it at, if it subsequently drops back to that level.
  3. You may select a call with a higher strike price in ex-div months. The additional cost of exercising the call may discourage the dividend troll from calling the stock, or the additional amount you bring in on the stock sale may offset the loss of the dividend.

% Annualized Return from option

Column 8 assumes that you do the same thing over and over and that the stock is not called. If you sell a 1 month call, it multiplies the return by 12. If you sell a 2 month call, it multiplies by 6, etc. If it was an ex-div month, it assumes that the dividend was lost, and it is deducted from the return. (Strictly speaking, we should only deduct 1/3 of the quarterly dividend, since it would only be lost every 3d month, but we prefer to be pessimistic.)

This number can be compared with the dividend to see whether you would "Double Your Yield", or perhaps do even better.

Net Take pre fees

Column 9 calculates the actual dollar amount you would bring in if you sell as many calls as you have shares of stock, again, accounting for a possible dividend loss in ex-div months. If the stock is called, you would also have to figure the capital gain or loss on the stock.
These services are provided as is, with no warranty of any kind as to usability or accuracy. The user assumes full responsibility for any losses incurred by use of these services.
© 2019 Harvey S. Frey