Maximize Covered Call Profits with Barchart's New P&L Charts
In this article, I'll show you how to sell covered calls, which is one of my favorite ways to generate a little extra income on stocks I already own.
Let's get started!
What Is a Covered Call?
A call option is a contract that gives the buyer the right but not the obligation to buy a specific asset or underlying stock or commodity at a specified price or strike price before or at a specified time or expiration date.
A covered call involves selling a call option on stocks you already own.
The goal of the covered call strategy is to generate income by collecting premiums from selling call options on the stocks or ETFs you already own.
Timing is also important, and covered calls work best when you expect the stock price to remain relatively stable or rise moderately.
As an option seller, your goal is for the call to expire worthless so you can write more contracts, and collect additional income. The longer you keep the underlying security, the more contracts you can write against it, and the more premium you receive.
The biggest risk in selling covered calls is assignment. If the underlying stock or ETF trades above the strike at expiration, the option expires in the money and you'll be assigned. This means selling 100 of your underlying security for each contract sold. Of course that also means you'll collect 100 times the strike price, times the number of contracts sold.
Let's say you own 100 shares of XYZ stock that you've been holding for years. You bought them at $50 and today, you want to earn a little extra income from them. Well, in this case, a covered call might be a good strategy, if you expect the stock price to stay around a certain level over a specific period of time.
Let's say you decide to sell your covered call against it, with a $55 strike price that expires 30 days from now, and you collect $2 per share, or $200 per contract. That $200 is yours to keep.
With this trade, if the price of XYZ trades above $55 at expiration, you'll be automatically assigned and you'll sell your 100 shares for $55 each. In this case, you already got the $200 in premium and the $5500 in proceeds from the sale, but you no longer own the shares.
However, if XYZ stays below the $55 strike at expiration, your option is out of the money. It expires worthless and unassigned. That means you keep the stock, and of course your $200 in premium. This is the most ideal situation, because then, you can write another covered call on the same underlying, and collect additional income, if you wish.
Stick around, because, I'm going to show you can tilt the odds in your favor using Barchart, so more of your covered calls expire unassigned.
You might have heard some traders saying that covered calls are risk-free. I can appreciate their mindset because if the stock price goes down, you won't crystalize any losses unless you sell your shares. And you collect the premium. But that's not the whole story.
The tradeoff in collecting premiums from covered calls is that you limit your potential upside profit. So, using the previous example, your shares, which you bought for $50 each, were called away at $55. So that's $5 per share profit plus $2 per share for the call.
But, what if the stock jumped to $80 per share? That means you'll still sell the shares at the $55 strike, and miss out on any of the profits above that point.
And that's the balancing act you need to do when selling covered calls. You're trading unlimited upside for steady, reliable income. And for many, selling covered calls is an excellent way to earn additional income from the stocks they already one.
Key Metrics That Impact Covered Call Performance
When you're trading covered calls, you want to increase your chances of success. And for all options trading, it's always best to look at the Greeks.
Options Greeks are metrics that tell you more about your option. For covered calls, the most important ones to consider are delta and theta.
When it comes to selling covered calls, delta gives us a good idea about the chances of the option expiring in the money. If a covered call has a -30 ( (030) delta, it'll have a 30% chance of expiring in the money, but that also means it has a 70% chance of expiring worthless - which is your goal when selling covered calls.
The second most important options greek when it comes to selling covered calls is theta. Since options are time-bound contracts, and all things being equal, as each day passes, the value of an option decreases. Time decay also accelerates as expiration nears, meaning the option loses value more quickly the closer it gets to expiration.
So, how can this help you with covered calls?
Well, the higher the theta you trade with, the better your chances of the trade expiring out of the money since the option will lose value faster.
With that information, you might consider selling covered calls with shorter expiration dates. However, you need to remember that short dated options, like covered calls with maybe 1 or 0 days to expiration, won't net you that much premium. Actually, more often than not, it is just not worth your time.
But, one thing you can do is use option prices to predict where the market expects the underlying's price will be by a specific period. This is called the Expected Move, and it's calculated by taking 85% of premium prices for at-the-money long straddles, then adding and subtracting them from the underlying's current trading price to form a range.
Now, if you think you have to break out your calculator, you don't. Barchart's new P&L charts tell you the Expected Move already, so you can easily track the expected ranges on options with different expiration dates. Based on that, you can choose your preferred strike price for covered calls. And I'll talk more about this feature later.
Introduction to Barchart's P&L Visualization Tool
Now, let me show you how to find a covered call trade and how to visualize it, along with getting all the relevant metrics you need.
Start by searching for a stock or ETF. Nvidia is on my radar recently so I'll use that. On the stock's profile page, you can immediately see the price chart. A quick check on the 3-month chart shows you a potential resistance level at around $120 to $122. Now, if that were the only information you can go on, you'd probably set the strike price above that level, and call it a day.
To improve your chances of success, let's go straight to the covered call screener. And here we already have plenty of covered call trades for Nvidia. You can change the dates right here. I like to trade covered calls with 30-45 days to expiry as they offer more premium and time to adjust my trade, should I need to. So, I'll set the expiration to May 23, which is 41 days from the time of recording.
Now, remember we've identified the resistance level at around $120. So, it's a good idea to set the strike price above that. But how far above $120 should you place it while still getting a high enough premium, while balancing risk?
Well, you can always check the delta column for more information.
I usually aim for around -20 delta with covered calls, so let's choose this $130-strike short call with a roughly -20 delta as it suggests an 80% chance of the option expiring out of the money.
With the details on the screener, this $130-strike call can be sold for about $1.40 per share or $140 per contract.
But, if you want to dive further into your trade, simply click on the charting icon beside the expiration date and you'll be brought to the profit-loss visualization tool. It's very intuitive, with the red indicates how much the trade could lose, and the arrow at the loss line shows that the losses could extend further. Of course, this math includes the stock's downside price movement.
The green area is your potential profit. The dashed line is your breakeven point. Then, other relevant information can be found under the graph, like the setup, breakeven price, moneyness of the call, and more.
Then, you can move over to the Greeks tab, where all the options greeks are waiting for you. Delta is about -20, and theta is 6.
Next is the Expected Move graph. This chart tracks the expected range of the stock price within several periods, including your chosen expiration date. Based on this, the Nvidia stock could reach $125.25 by May 23 - below your $130 strike price, what is what you'll likely want.
Let's have a look at the Volatility tab. Here you can find Implied and Historical Volatility. Implied volatility or IV refers to the market's expectation of how much a stock's price will fluctuate in the future. It's not a predictor of the direction of the stock, up or down, just the magnitude of its movement.
The higher the IV of the asset, the more expensive the premium, because there's a greater chance the asset could make a significant move. For option sellers, elevated IV means higher premiums - and this is generally accepted to be the best time to sell options. Higher IV usually happens before earnings reports, major market announcements, and other similar events.
Excessively high IVs, however, are not ideal when selling options. IV does not remain high forever. After the earnings report or major event has passed, implied volatility typically drops, sometimes dramatically, as the uncertainty is resolved. This sharp decrease in IV is what traders refer to as a volatility crush.
So, to avoid getting hit by volatility crush, it's best to aim for trades with 50 to 60 or even 70 IV. That way, you'll collect the most premium without too much risk.
Historical volatility is a measure of the stock's volatility over the last 30 days. We've had some major price swings recently, so it's natural that HV is really high right now.
Then, the last tab is Trend, which shows the expected direction of the stock in the short, medium, and long-term.
The arrows are a visual representation of Barchart's opinion strength readings for each study, and the actual moving average prices are below the arrows.
Short Term is based on today's price vs. the 20-day moving average, medium based on the 50-day moving average and long based on the 100-day. Red means price is below the average, green means it is above.
The direction of the arrow reflects how far the price is from the moving average compared to the difference over the past year, which is essentially the distance from the crossover. For example, a reading of Strong suggests that the price is far away from the average and the trend is likely to continue in the near term.
These charts give you a view of everything you need, all in one place, saving you time finding and studying charts and graphs.
So, with all this information, you're now armed and ready to trade covered calls with the best chance of getting your expected results. This is huge for avoiding bad setups!
Advanced Use Cases
So far, I've covered the basics of the P&L chart, which I'm sure many new traders will appreciate. But, we can take it a step further and maximize the use of the P&L feature.
Let's say you want to compare different strike prices for your NVDA covered call visually. With Barchart, that's as simple as clicking on "Previous" or "Next" on the P&L graph. You can see how the profit/loss graph shifts with every trade, providing visual information about how the trade looks and how it aligns with your preferred risk levels.
Then, let's head over to the expected move tab. See the blue dotted line with "E" at the top? That's the date of Nvidia's next earnings report. This is critical information in options trading because volatility increases near earnings reports. Typically, selling options around those times can be attractive due to higher implied volatility.
But, for covered calls, you need to approach earnings with a slightly different mindset. Yes, the premiums are higher, and that's tempting, but there's a real trade-off here. If Nvidia delivers a blowout earnings report and the stock surges past your strike price, your shares can get called away, and you'll miss out on that upside. Remember, a covered call limits your profit to the strike price plus the premium you collected.
So before you sell a call right before earnings, ask yourself: Am I okay giving up potential gains if the stock skyrockets?
If the answer is yes, maybe because you're neutral or slightly bullish, then selling a covered call can be a smart way to reduce risk and generate income.
Also, consider adjusting your strike selection. For example, selling a call at a higher strike price gives you some breaking room for the stock to appreciate.
Finally, keep an eye on implied volatility crush after earnings. Even if the stock doesn't move much, the option's value can drop significantly due to falling IV, which works in your favor as a seller.
Now, let's say you're an advanced trader and want to further personalize the option screens. Well, you can easily do that by clicking the screen button at the top right of the results page. From there, you'll have access to Barchart's Covered Calls Screener, with dozens of filters for a more granular search.
Benefits of Using Barchart's Tool vs. Traditional Methods
Using the P&L charts give you an edge when writing covered calls. With it, you don't have to jump into excel or google sheets to do manual calculations or mental math. I should know how tedious it is, because I had to do it when I first started trading.
And this is what I like most about Barchart - all their features are cross-functional. As shown earlier, you can access your options screener from the symbol's covered call results, and from there you can also access the filters for the screener, giving you a 360-degree view of your potential trades all the time.
Final Thoughts
With Barchart's P&L charting featuring, you get a visual edge that helps you make smarter decisions when selling covered calls. It takes the guesswork out of the trade by offering you clear visuals that display your risk, reward, breakeven, and exactly how your trade could play out.
And remember, covered calls require balancing income with upside potential, and tools like this let you know your risks and rewards before you ever hit "submit."
Now, here's my challenge for you: Try it yourself. Head over to Barchart.com, pick a stock you're watching, and explore your next covered call visually. Then, give it a try in your brokerage's paper trading, or practice account. Trust me, once you see your trade mapped out, you'll never want to go back to pen and paper.