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2018issue C1042-43

Partial covered-call overlays at targets, resistance, and rich volatility

Covered call writing sells a call against a long share lot, collecting a credit while giving up upside above the strike. Editorial framing: write that call only when a planned share-sale target, overhead resistance, or a rich implied-volatility credit already explains the sale, and keep partial coverage so leftover shares still participate if the name breaks out.

  • A one-call-per-hundred-shares overlay caps upside at the short strike and reduces residual downside only by the premium collected.
  • If the underlying stays below the short strike through expiration, the writer keeps the premium, and that same credit is the only downside offset.
  • Editorial reading: write the call only when a planned share-sale target, overhead resistance, or a rich implied-volatility credit already explains why upside is being sold.
  • Writing fewer calls than the full share lot forgoes maximum income but leaves uncovered shares with uncapped upside if the stock trends sharply higher.
Entries in this reading3 entries
Current trackCovered call writing31 readingsOption income strategy43 readingsSupport and resistance170 readings

What the overlay pays

Covered call writing is selling a call against a long share lot so a credit is collected while upside above the strike is given up. A one-call-per-hundred-shares overlay produces a payoff with upside capped at the short strike and residual downside reduced only by the premium collected.

If the underlying stays below the short strike through expiration, the writer keeps the premium and the only downside offset equals that same credit.

An overlay instead of a standing coupon

Editorial interpretation: run the sale as an option income procedure, a repeatable set of entry, abstention, assignment, and roll rules that turns premium collection into a testable overlay instead of a one-off coupon. Write only when a planned share-sale target, overhead resistance, or a rich implied-volatility credit already explains why upside is being sold.

A planned share-sale target

A predetermined share-sale target supplies a natural strike. Rewrite that strike while price stays below it, and allow assignment if the target is reached.

Overhead resistance

Overhead resistance is a prior high that has already rejected price and can justify placing a short strike at or just above that stall while the range is tested. When prior highs are expected to cap a name, a short call at or above that resistance can collect income while the stock tests a breakout, a breakdown, or a continued range.

A rich implied-volatility credit

Implied-volatility credit is the options market's priced-in move; a spike fattens the premium that is also the overlay's maximum profit at initiation. The credit received at entry is the overlay's maximum profit, so a spike in implied volatility is treated as a condition that increases the premium available to the writer.

Keep leftover shares uncovered

Partial coverage means writing calls against only a fraction of the long shares so uncovered stock keeps uncapped upside if price trends through the strike. Writing fewer calls than the full share lot forgoes maximum income but leaves uncovered shares with uncapped upside if the stock trends sharply higher.

Editorial interpretation: size the short below a full hedge so leftover shares still participate if the name breaks out.

If price trades through the strike

After price trades through the strike, the writer can accept assignment, repurchase the short call, or roll to a higher strike by buying back the original option and selling another. A roll-up is repurchasing the original short call and selling a higher strike after a rally, accepting a possible debit and extra transaction cost to keep the stock.

Partial covered-call risk curves vs Intel stock price

Payoff of 1,000 long INTC shares with only five short September 50 calls, plotted against stock price. Unlike a fully covered lot, leftover shares keep the right-hand slope rising through the strike, so a breakout still pays. Values were read off the OptionsAnalysis risk-curve panel for 46, 31, 16 and 0 days to the 21 Sep 2018 expiry, using the $49.30 INTC print and $1.22 call credit given in the column.
Payoff of 1,000 long INTC shares with only five short September 50 calls, plotted against stock price. Unlike a fully covered lot, leftover shares keep the right-hand slope rising through the strike, so a breakout still pays. Values were read off the OptionsAnalysis risk-curve panel for 46, 31, 16 and 0 days to the 21 Sep 2018 expiry, using the $49.30 INTC print and $1.22 call credit given in the column.INTC · days to 21 Sep 2018 expiry · 2018-08-06T00:00:00.000Z to 2018-09-21T00:00:00.000Z

Pre-expiry curves are digitized from the raster (about ±$150 / ±$0.2). The 0-day kink at the 50 strike matches long 1,000 shares plus five short 50-strike calls, not the figure caption’s “short one.” Snapshot date 6 Aug 2018.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
22 of 25 in the Covered call writing track
201910-13 pp.Next on Covered call writingWeekly covered-call writing as a two-book credit-spread caseEarlier covered-call writing rewrote a short call on a quarterly and then a monthly calendar. Weekly listings made a one-week rewrite cycle available.
All readings on this track · 25 readings
  1. 1995Sequenced covered-call repair after a growth-stock drawdown
  2. 1996Covered-call writing as income and assignment discipline
  3. 1997Relative volatility rank for covered-call overlays
  4. 1997Covered call time, probability, and implied volatility
  5. 1999Covered-call income when implied volatility is cheap
  6. 2000Covered-call income and assignment flexibility
  7. 2002Covered-call expiration rate versus expected value
  8. 2003Covered-call versus diagonal housing after a single-name drawdown
  9. 2003Covered-call overlay on a stock portfolio as a payoff case study
  10. 2003Ratio backspread and covered-call assignment construction
  11. 2004Covered-call income is not a safety net
  12. 2006Evaluating consecutive covered calls across market regimes
  13. 2007A job-first audit of commodity options in a futures book
  14. 2011Horizon checks on Covered call writing, the risk-reward ratio, and the Relative Strength Index
  15. 2012From ex-date verticals to leftover buy-writes, and a call backspread that stays net long
  16. 2013Year-long covered calls on high-yield industrials
  17. 2014Year-horizon covered calls on Dow yield ranks
  18. 2014Covered-call premium as a cost-basis cushion
  19. 2014Monthly buy-write construction with traffic-light exits
  20. 2017Low-volatility covered calls need a real premium buffer
  21. 2017Covered-call futures income as one testable procedure
  22. 2018Partial covered-call overlays at targets, resistance, and rich volatility
  23. 2019Weekly covered-call writing as a two-book credit-spread case
  24. 2019Weekly option income as one holding-period case
  25. 2019Locking long-call profit with a temporary overlay
By fieldOptions and volatility171 readingsBy year201898 readings
All 31 readings tagged Covered call writing
Also on Covered call writing5 readings
1995Sequenced covered-call repair after a growth-stock drawdown1996Covered-call writing as income and assignment discipline1997Relative volatility rank for covered-call overlays1999Covered-call income when implied volatility is cheap2000Covered-call income and assignment flexibility