The question was:
Pop Quiz #1: Before establishing a new position, what are the 3 most important decisions for the Covered Calls investor? Which of the three is most important?
The Covered Calls Advisor was encouraged by the number of replies received and the thoughtfulness of those who responded. Most satisfying were the insights into the Covered Calls strategy evident in the responses received.
Recognizing there is not a 'correct' answer to the question, I nevertheless offer my thoughts below which are focused on the three most important 'decisions' we make prior to establishing a Covered Calls position, namely:
1. Stock selection
"Stock selection is Job #1 for the Covered Calls investor" -- as such, this is the MOST IMPORTANT decision we make as Covered Calls investors.
I commit about 80% of my investing-related time to stock selection -- reading, researching, analyzing, and thinking about individual companies and the competitors in their industry. The objective is to establish Covered Calls in companies we are most bullish on.
2. Strike Price selection
In comparison to the typical buy-and-hold investor, an advantage of Covered Calls investing is that it provides us with the flexibility to adjust our holdings based on our current stock market outlook. When our sentiment is Bullish, we sell out-of-the-money Call options; when Neutral, near-the-money options; and when Bearish, in-the-money options.
3. Expiration Date selection
I prefer short-term (one month or less until the options expiration date) positions primarily because they provide higher potential annualized return-on-investment (aroi) results than longer duration positions. I consider a good aroi as one that is higher than what could be achieved from a similar Covered Calls position in the S&P 500 Index (SPY).
Second, short-duration Covered Calls provide more frequent opportunities to decide whether to continue with the current stock at options expiration or move on to a Covered Calls position with another stock that we believe provides a better future opportunity.
Third, and also related to choosing the options expiration date: (1) because of greater stock price volatility when earnings are reported, I normally avoid holding stocks when there is an earnings report prior to the options expiration date; and (2) always check if there is an upcoming ex-dividend date before expiration. If so, include it when making your aroi calculations prior to investing.
I hope you find this answer helpful as you analyze your own Covered Calls investing process.
Best Wishes, Godspeed, and Stay Safe,
Jeff Partlow
