40 Option Trading Tips You MUST Know to Trade  » Learn More
Weekly Covered Call Picks of the Day Back-Testing Analysis...
This weekly search for covered calls was intended to be a short-term play for income. We wanted to hold the positions during the week and clear the positions out at the end of the week and start over again the next week. Since the positions are held for a short time period, emphasis was put on the technical aspects of the stock as opposed to the fundamentals. Fundamentals are important for longer-term holding, but have less influence on short-term trades.

Screening parameters were set up for options, technicals, fundamentals, and lists to meet our short-term income goals. Weekly options were chosen to increase returns relative to monthly positions. Our objective was to earn 20%+ per year with the weekly selections. The screening parameters were:

We looked for option expiration dates less than 8 days out in time. This made available all the weekly expiring options and the monthly options in their last week before expiration. The return requirement based on % if unchanged in the stock price was set to greater than 0.7%. Strike prices were required to be 1% in-the-money (ITM) to provide some safety with the expectation of assignment on Friday. A minimum bid of $0.50 was set and was easily achieved. When multiple positions for the same stock resulted, We screened to take the one with the highest return. An open interest of 10 contracts was set as a minimum for liquidity.

To help with execution at the mid-point between the bid and asked prices, a limit was set on the amount of bid/asked spread allowed. The dollar amount of bid/asked spread was set to less than $1 and the %bid/asked spread was set to less than 50% over the bid price. The use of mid-point limit orders is important. It substantially increases the returns obtained over selling the calls at market or bid price. Tactically the call sell order may not execute immediately, but it pays to be patient. If the order does not execute in 15 minutes consider re-setting the mid-point price or increasing it slightly.

To further support my liquidity needs we filtered for the average stock volume to be greater than 500 thousand shares per day. We wanted the stocks that were moving up in the short-term, so we filtered for stock price to be greater than the 20-day moving average. To further support the upward trend of the stock we looked for each stock to have a positive MACD and that the MACD signal be positive for a minimum of 1 day. We tested several time frames for the MACD crossing and using the minimum time of one day proved best.

As mentioned, we put more emphasis on the technicals rather than fundamentals because of the short-term period of the trades. Therefore, fundamentally we only looked for a stock price greater than $10 with the requirement that no earnings announcements came out during the hold period to avoid sudden unpredictable changes in stock price.

I excluded ETFs because of the higher returns with equities only.

The SPX net change over the year from 5/15/2015 to 5/21/2016 was flat.

The back-testing process used was to initiate a trade in the 2 highest return (% if Unchanged) positions that resulted from the screening parameters. These short-term trades were placed at the closing prices on the Monday of the week of expiration. Therefore, each position would have a 4-day holding period of Tuesday to Friday's expiration. One half of available capital was deployed to each position. Since the positions were slightly ITM, most positions would be assigned at the end of the week. But, if the options expired OTM and worthless the stocks were sold using the Friday closing prices.

The back-testing period was over 1 year from 5/15/2015 to 5/21/2016. There were several sharp declines over this period and then commensurate recoveries. Because of these decline/recovery periods, we feel that this testing period is a good representation of general market conditions and an appropriate period to use for a long-term strategy test. The net change of the year was flat for the SPX.

As one might expect with covered calls, when the market was up the returns were great and when the market declined there were losses. Controlling the losses during the down cycle and having more wins than losses over time provided the net positive returns. It was critical to control the losses.

We used a stop loss on the stock price of 10%. The position was liquidated if the stock closed with a decline of 10% from the purchase price. Many different stops were tested based on the option and stock prices, but the 9-10% stock price stop proved the best. Returns without a stock stop loss exit in place were substantially reduced.

Testing Results:
During the one-year test period there were 104 trades (52 wks. X 2 trades per week). A summary of the covered call analysis results is:
  • 77% of the trades were winners out of the 104 trades total
  • Average return on a winning trade was +2.3%
  • Average loss on a losing trade was -3.2%
  • 58% of the losing trades were the result of the 10% stop loss on the stock
  • Starting with $100,000 the ending balance was $124,000 over the one year.
While back test results like this do not guarantee future results, it is reassuring to find some support for the screening parameters used to search for opportunities under varying market conditions. One might expect results to be better in a strong bull market and worse in a bear market.


No credit card required · Easy tutorials to get started · Free Coaching Sessions
Start My Trial Now
Important: Your Password will be sent to you by email. Please make sure that your email is correct.
Picks of the Day - Sample Weekly Covered Call Trades - Trades Based on Back-testing