Renting Out Your Stocks for Cash Flow

The below chart is the Covered Call Process Flowchart as presented by Joseph Hooper and Aaron Zalewski in their book Covered Calls and Leaps - A Wealth Option.

I will go into detail on the individual decision points at a later point but for now, here is the overview.

You enter into a new position following a certain set of rules. (to be covered.) Ensure that the stock is in the bottom 25% of its current price cycle. If the stock increases in price, you either get called out (sell the stock and keep the premium) or you close on the delta effect. (the stock price increases greater than the option buyback cost and you can now buy the call back and sell the stock for a profit.) At this point, you can now follow the rules to enter a new position.

If the stock price drops, you potentially enter territory where you can not sell a call at a profitable called return. (your cost basis is higher than a profitable strike price call.) If you can sell a call for a called and uncalled return of 4%, then go ahead and do so following the rules of a secondary call sell. (covered later) If you cannot, then you need to enter a defensive technique called the Tethered Slingshot or TSS.

In the TSS technique, if you are in danger of being called away for a loss, you buy back the call and then immediately turnaround and sell a call at the second to last expiration date at the same strike price for a minimum 10% uncalled return with the intention of buying the call back once the stock cycles down. The idea is, you sell the TSS when the stock is at 75% of its current cycle and then wait for it to drop down and buy it back for a positive return. The initial buyback creates a temporary loss but the sell of the second to last expiration will cover this loss and the buyback will help to generate a profit.

If your stock does not have a call on it and you cannot profitably sell a call for a 4% called and uncalled return, then you simply enter the TSS technique while adhering to the 75% rule - sell the second to last expiration for a minimum 10% uncalled return (using the higher of the market value or your cost in the stock), wait for the call to cycle down and buy it back for a profit.

If the stock does not cycle down, if instead it shoots up, then you should look to close on the delta effect (the sell of the stock will reap a greater reward than the cost of the buy back of the option) or look to the Surrogate Stock Replacement technique which I will cover in a subsequent post along with the CPR technique.

All of the preceding information can be found in Joseph Hooper and Aaron Zalewski's book Covered Calls and Leaps - A Wealth Option.