The Covered Calls Farm
Planting and Harvesting Covered Calls for Fun and Profit using a Farming Strategy
Back Forty Crop
This crop contains short term positions normally in the 1-2 months expiration period. Allan Ellman in his book does a great job of describing this strategy. Basically, premiums appear to erode faster during the last few months of the life cycle of a call option. Typically premiums are in the 1-3% range depending on the stock, speculation, volatility and other factors. Since there is small downside protection with this approach it is very important that the call/write is carefully selected to ensure the highest chance of success.
A wild card is when earnings are reported or there is other expected and unexpected news. As we know they can drive a stock quickly in either direction. If you have purchased the stock and written a low premium call an unexpected drop can
create a quick loss. So, selection and timing of events is important to consider.
The key to making a solid annual return is to repeat this process many times during a year. If you can achieve a 1-3% return with each position, the annualized return can be fairly high assuming you are hitting the right stuff each time you replant or rotate your harvested crops.