For those discovering the income generating magic of covered call writing, one of the first questions is what covered call strategy to use in each type of market, and which strike price to sell.

Every trader or investor needs to thoroughly understand what trend the market is following. Trends can be up, down, or sideways, and within these trends the direction can be strong moderate or weak. There may be instances where the market is trending down and your stock of choice is trending up. This can be a danger sign because stocks can’t fight the tide of the market for long.

It’s estimated that almost 60% of a stock’s movement is due to the market and the market sector. The remaining 40% is about the stock itself. That explains why many perfectly good stocks get totally trashed if other stocks in their sectors underperform, and if the market is down.

Covered Call Strategy Guidelines

Strong Uptrend

The trend we all cross our fingers and hope for so we can bank premium and stock appreciation. Strategy is to sell out-of-the-money calls.

Moderate Uptrend

This is our second favorite trend. The strategy is to again write at-the-money calls or out-of-the-money calls not as far out. For example if a stock is $80 and on fire, you could write the $85’s. In a moderate trend, write much closer to the stock price.

Weak Uptrend

These trends can be solid produces too. Sell calls at-the-money for the best premiums.

Ranging Market

If the market is cycling in a range along with your stock, the best strategy is to find the stocks support level, where in the past it has gone down and buyers came in. Wait for it to reach and bounce off support and sell at-the-money calls. If you are an experienced trader and see an upward pattern, then sell out-of-the-money calls. The fattest premiums will be at-the-money and if the stock does shoot up, you must either buy back the calls you sold at a higher price to keep the stock or just live with being assigned.

Slight Downtrend

If the cycle is drifting down during one of those periods where there is no news and not much happening, then sell at-the-money or in-the-money calls. The extra premium of the in-the-money calls with give more downside protection. For example, if the stock is at $80, you could sell the $80 for whatever premium, maybe $3.00 or more depending on volatility. The stock can fall to $77 and you are protected.

Moderate Downtrend

The way to be successful here is to know where support and resistance are, then sell a call more deep-in-the-money for the best downside protection. Make sure the premium is 15% to 20% of the stock price.

Strong Downtrend

The best strategy here is to stay on the sidelines! You could sell a very deep in the money call to give yourself protection. My opinion in this case is to just buy a put! If the stock you are selling calls against is a portfolio stock, then hopefully you are using a married put strategy to sleep well at night!

As you can see there is a covered call strategy for every market. Your personal style as an option seller will also dictate which strike price you sell. If you are conservative, then you may sell calls closer to the money to give downside protection. If you are aggressive and think the stock will run, you will sell out-of-the-money calls. Remember this: a conservative 4% a month compounded monthly will turn $50,000 into $524,288 in five years. Not bad for a limited risk strategy.

Check out weekly call options here for even more ways to super size premiums.