Thank you Walid for your kind words. They mean a lot to me.

As for your questions, allow me to answer the second first. Personally, I prefer to write near-term at-the-money calls. These calls typically represent the most active group among all options series, which means they are relatively easy to enter and exit.

I don’t normally write calls that are significantly out-of-the-money because that would presume that the stock was going to rally. There is very little in the way of downside protection offered by out of the money covered call writes. And if I think the stock is going to rally, I would prefer not to cap my upside.

You mentioned the option tools that the MX has on its Web site. These are excellent tools for a couple of reasons; 1) they provide good information if you know how to use them and 2) they are free. In today’s blog, I will look at the covered call calculator. Later this week, I will review the option calculator.

The covered call calculator is located on the main page of the MX Web site. Just click covered call calculator on the left side of the page. According to the MX, “the covered call calculator enables conservative investors to find option series that can generate their desired levels of current and potential returns. The potential total return is the sum of two components: the option premium return and the potential capital gain.”

With the covered call calculator, you can screen the Canadian universe of covered call writes to assess which strategy best meets your needs. All of this done on a rate of return basis.

Getting back to the total return concept, The calculator allows you to set screens on the basis of premium income and capital gain. That allows the user to prioritize which component of the covered call write is most important.

For example, suppose you were interested in a covered call write that provided a 10% rate of return and a 0% potential capital gain with an expiry in November (note: these returns assume current option prices where the returns are annualized). The example cited yielded 8 potential candidates, with the primary one being IAM Gold Corporation (symbol IMG, recent price $8.65) November 9.00 calls with a premium of 50 cents.

If you set the calculator to prioritize by premium with 0% capital gain assumption, it will typically yield at-the-money covered call writes. If you prefer to increase the potential capital gain and reduce the premium component, the calculator will typically provide you with out-of-the-money covered call writes.

Obviously the calculator only screens on the basis of rate of return. It does not purport to analyze the merits of the underlying stock. Which is to say, it simply sets out to screen the second step in the process of putting together an option writing program. You still need to have a view on the underlying security. And if you are writing calls, that view should be bullish.