Covered Calls Strategy

Our AI Algorithm is based on a covered calls strategy. In short, a covered calls strategy involves the purchase of the underlying stock and then selling call contracts while using the stock as collateral. One of our most important features our algorithm produces is the ability to select strike prices below the current trading price of the stock while still earning a return. This allows the stock to move down without actually impacting the profit of the trade. We use this as part of our risk mitigation to allow for stock fluctuations to occur.

Sample Trade

This is sample information of a trade that was shown prior. In this example, the account balance used is $10,000 and the relevant data is shown. This trade was categorized as a riskier trade with a max yield of 7.92%. At expiry, this trade returned 5.97%.

Step 1:

Calculate how much stock you will be purchasing rounded down to the nearest hundred.

Step 2:

Calculate how many options contracts you are able to sell.

Step 3:

In your trading platform, find the call contract identified by the strike price, contract price, and expiry date provided. Once the contract is found, sell 23 contracts at the price indicated and collect the premium. If it is possible to sell for a higher price, always sell higher.


Important Note

At this point, the initial shares purchased are held as collateral for the contracts that you have sold. You are unable to sell or trade this stock until expiry or early exit of the trade

Step 4:

At this point, one of three may occur and is dependant on the price of the stock at expiry.

a. The stock price ends at anything ABOVE the strike price.

b. The stock price ends BETWEEN the strike price and the Breakeven price (BE).

c. The stock price ends at or below the Breakeven Price.

Step 4a:

If the stock price ends above the strike price at expiry, the stock will automatically be sold at the strike price, and the options contracts you have sold will expire worthless. This means that you get to keep the premium you have earned from selling the contracts previously.

Step 4b:

If the stock price ends between the strike price and the breakeven price, you will still be in profitable however less than what is shown. When this occurs, you will keep your stock and it will not be automatically sold. You will also keep the premium you have earned from selling the contracts prior. However, at this point to exit the trade you must manually sell your stock. The contracts will be expire worthless and will not reflect in your account. For this example. lets assume the stock price ended at $3.80.

Step 4c:

If the stock is at Breakeven and you exit the trade at the BE price, you will not have earned anything. Losses will occur at any price lower than the breakeven point. It is recommended to exit the trade at or near the breakeven point as fees (if applicable) and minor price fluctuations may cause slight losses. For this example, we will assume you have no exited at breakeven and the price is currently at $3.50 and you wish to exit the trade.