Covered Call Scanning

By Michael Burke

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Before trading any asset class, customers must read the relevant risk disclosure statements on our Other Information page. System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system and software errors, Internet traffic, outages and other factors Scanning The <>Covered Call Scan indicator for RadarScreen helps you find call symbols that offer the highest potential return based on your option symbol criteria for and date. This indicator requires RadarScreen and allows you to compare and rank up to 1,000 optionable symbols based on their covered call percent returns on an intra-day real time basis.

Note: Percent returns are based only on the options written and do not take into consideration any trade probabilities or losses from the decline in price of the underlying asset.

%Return = Option Price / Asset Price - less any in-the-money adjustment. Max%Return = %Return + plus any out-of-the-money potential gain up to the strike written.

Trading Concepts behind Covered Calls A covered call or buy-write is when a trader owns a position in a stock or other optionable asset and writes (sells) call options against that same position in an effort to generate revenue from the asset held. Normally the trader has a -term neutral or slightly bullish outlook on the asset price movement.

Example: Covered Call Write Options Strategy Long 100 shares of ZYX @58.00, $5,800.00 paid (debit to your account). Short 1 ZYX OCT 60 Call @3.25, $325.00 premium collected (credit to your account).

Result Maximum loss is unlimited to a stock price of 0. Maximum gain is the premium collected and the difference between the strike price and the stock price (e.g., 60 - 58 = 2.00 + 3.25 = 5.25 * 100 = $525.00). You could also think of this as a new cost basis for the stock at $54.75.

Risk Factor Effect Price Sensitivity (Delta) Position increases in value up to the strike price as the underlying asset price rises and decreases in value as the asset price falls below the new cost basis of the underlying asset.

Time Decay (Theta) Position generally increases in value with the passage of time.

Volatility Sensitivity (Vega) Position generally increases in value from falling volatility and decreases from rising volatility.

The breakeven point for a covered call is calculated by subtracting the premium collected from the cost of the underlying asset: $58 (cost of asset) - $3.25 (premium collected) = $54.75 (breakeven price or new cost basis for the stock).

Risks Writing covered calls does not protect the trader from downside price risk in the underlying asset, but only mitigates the losses by the amount of premium collected for the covered call written. Also, writing a covered call prevents the trader from participating in any upside price movement in the underlying asset beyond the written covered strike price. <>Covered Call Scan (RadarScreen Indicator)

The <>Covered Call Scan indicator displays the percent return and maximum percent return for two different strike price options, both with the same expiration date. This return is “simple” based on the value of options at the expiration date (not annualized). The indicator only works for and stock index options.

You can adjust the strike prices, expiration date and strike increment through the indicator inputs.

By double-clicking on any of the percent return column headings (%Rtn), you can rank the list of optionable stocks; those with the highest potential returns are sorted to the top of the list.

Sample Workspace The sample RadarScreen window included here also has two built-in TradeStation indicators that can help in covered call trade selection: “ - All Options” and “Volume - All Options.” You can learn more about those indicators from the TradeStation Help.

As a side note: I used the Scanner in TradeStation to create the RadarScreen Covered Call Scan symbol list using these two criteria; First, I look for the top 300 stock symbols that have the highest Put/Call , and then filter that list to only stocks that trade at greater than $10.00 per share.

Error When Adding Symbols

You can add any additional optionable stock symbols to the RadarScreen window in order to calculate their covered call return. When inserting symbols, you may get a data request error (a little red “e”); this is normally caused by an invalid expiration date setting in the inputs. Make sure you set the expiration inputs to a valid option expiration date; weekly and monthly expirations are supported. <>Covered Call Scan (RadarScreen Indicator)

Inputs StrikeOffset(0) - 0 means nearest ATM (at-the-money) option, and first ITM (in-the-money) option. You can shift the strike prices further in the money with a negative input value and shift the strike prices further out the money with a positive value. (e.g. 1, would shift the strike prices one strike further out-of-the-money, -1, would shift the strike prices one strike further in-the-money.)

StrikeIncrement(0) - 0 means standard strike price increments will be used based on the asset price; you can use this input to override the default increments set by the indicator. For example, you can force all strike prices to increment by 5, or 2.5.

ExpYear(12) - Expiration year. ExpMonth(10) - Expiration month. ExpDay(20) - Expiration Day.

Note: You can use OptionStation Pro to determine the exact options expiration date for these inputs. Typically, monthly stock option expiration is the Saturday after the third Friday of the month.

Note: You can set/change any of the inputs for all symbols or for individual symbol rows.

Plots: Plot1 - "ATM Call Px" - Inside bid price of the at-the-money (ATM) option selected. Plot2 - "ATM CallX" - Strike price of the ATM option selected. Plot3 - "ATM %Rtn" - Percent return at expiration date for the ATM option selected. Plot4 - "ATM Max%Rtn" - Maximum percent return for the ATM option selected. Max return assumes the underlying asset increases in value to the option strike price that was written.

Plot5 - "ITM Call Px" - Inside Bid price of the first In-The-Money (ITM) option selected. Plot6 - "ITM CallX" - Strike Price of the ITM option selected. Plot7 - "ITM %Rtn" - Percent Return at Expiration Date for the ITM option selected. Plot8 - "ITM Max%Rtn" - Maximum Percent Return for the ITM option selected. When covered call options are written, in-the-money, the maximum return is based on the option premium.

Plot9 - "Expr Date" - Expiation Date based on the indicator inputs. Plot10 - "Days2 Expr" - Days to Expiration Date.

Note: Percent returns are based only on the options written and do not take into consideration any losses from any potential decline in price of the underlying asset. Return values are “simple” based on the value of options at the expiration date (not annualized).

Risks Writing covered calls does not protect the trader from downside price risk in the underlying asset, but only mitigates the losses by the amount of premium collected for the covered call written. Also, writing a covered call prevents the trader from participating in any upside price movement in the underlying asset beyond the written covered call option strike price. <>Covered Call Scan (RadarScreen Indicator)

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