If you feel, the markets bull run might come to an end, you can take profits. While taking profits is never a bad idea, trying to time the market is. Cashing in, step to the side lines and watch what’s going to happen, most likely results in missing the next move up. For your (remaining or part of remaining) position you might consider the following strategy: Covered call writing
If done properly, covered call writing is the simplest, most conservative strategy to use options. Covered call writing is a moderately bullish strategy. When you write a covered call, you’re basically trading upside for income.
“Writing a covered call” means, you are selling an option with a strike price above current market price on a stock you already own. You sell the right to call your underlying stocks at the strike price and in return you are collecting the premium (the price that the call buyer is willing to pay for the option). The premium paid by the investor is your additional income. You can keep the premium no matter what.
The possible outcomes:
Scenario A: If the stock price rises, but fails to move above the strike price of the contract, the investor who bought our call option will let it expire worthless. You get to keep your shares, any dividends paid, plus the premium of the option paid to you. Once the option expires worthless, you are able to write a new call with a new strike price and a new time frame. This means you can continue collecting more and more premiums.
The premium collected would add to your potential profits and dividends received.
Scenario B: If the stock goes nowhere or down during the life of the option contract, we have a similar scenario as A, even if the stock temporarily goes above the strike price but the investor holding our option fails to exercise it. Like A, you get to keep your shares, any dividends paid, plus the premium of the option paid to you. once the option expires you would be able to write a new call with a new strike price and a new time frame. This means you can continue collecting more and more premiums.
The premium collected would reduce your potential losses, if the stock price moves significantly lower. You are better off with the covered call writing strategy than without.
Scenario C: The stock rises above the strike price and the investor exercises the option before it expires. In this case, you are obliged to sell your shares to the options holder at the strike price of the option. This is your only obligation. The worst thing that can happen with covered call writing is the opportunity to sell the shares at a higher price in the market. But with covered call writing, you can never suffer any additional downside risk, as long as we pick strike prices that are higher than our entry prices plus commissions.
1. Ideally, sell your covered calls at a higher strike price than the price you paid for the shares including commission costs.
2. Write call options with strike prices that are higher than the underlying stock current market price.
3. Place limit orders when buying options to guarantee the premium you want to collect.
4. Never sell the underlying stocks before the contract expires or you have bought back the call option.
Stick to the rules because this is the only way to be sure that you won’t lose money on a covered call strategy.