Equity Options for Sideways Action

The market has been doing a lot of up and down action over the past few weeks, not really going much higher or lower overall. Many stocks are doing the same thing. Certainly, this is better than stocks moving lower, but it still can be frustrating. If you own shares and know about options, there is a solution to that problem: a covered call.

Covered Call

As a knowledgeable option trader or investor, using a covered call when the stock is trading sideways may make perfect sense. A covered call is owning stock and selling a call option that is usually out-of-the-money (OTM). Generally, an investor will sell a call for every 100 shares. The call can be bought back at any time, expire worthless or get assigned if the stock closes above the strike price at expiration.

DASH Example

Take a look at a recent chart of Doordash Inc. (DASH). This is a 1-hour chart, but you can see how the stock has pretty much traded in a channel moving slightly lower. Not a great way to boost your P&L.

Here is a recent trade idea I talked about with a student who owned shares of DASH. At the time, you could sell a 117 strike (correlating with potential resistance above), which was about $5.50 higher than the current price of the stock, and bring in $0.93 worth of premium with less than 2 weeks to go until expiration, as seen below.


That 0.93 ($93 in real terms) might not seem like much, but with the stock expected to stay below that potential resistance level, it’s practically a no-brainer. And imagine doing that several times over the course of time. That can really add up and increase your P&L much more than just holding the long stock position.

Final Words

Not every covered call will work this efficiently time and time again. But with a neutral to slightly bearish forecast, selling some premium to increase profits may be your best option.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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