Secondary Call Sales

Any call sale that occurs after you have bought back the original call or the original call has expired is considered a secondary call sale. In the flow chart below, as presented by Hooper and Zalewski in their book, Covered Calls and Leaps, the secondary call sale rules fall under the "Stock Decreases" channel. For now, I am skipping CPR. Don't worry, you can still utilize the tool without CPR at this point.

To reach this point, you previously established a new covered call position and were not called out and did not close on the delta effect. If you used the mid-month buyback rule, you bought the stock back in the first two weeks in to lock in a 4% and placed a GTC order to sell the same call at a higher price. If you were called out, you follow the stock increases channel and go back to the rules for entering a new stock position. If you were not called out, or your call expired, both as a result of the stock staying flat or decreasing in price, you follow the rules for a secondary call sale.

Here are the rules as presented by Hooper and Zalewski in their book, Covered Calls and Leaps.

1. Secondary calls can only be sold when the markets are in the green (higher than the close of the close of the previous day).
2. For U.S. options, if you can sell a near month call where the uncalled and called returns are both > 4%, then do so.
3. If rule 2 doesn't work, use a TSS for income (covered later) while adhering to the selling high rule. In order to do this, move the expiration of the call out to the second to last expiration and sell a call that provides an uncalled return minimum of 10%. Do not sell the last expiration of the option series. This must be kept in reserve for defensive techniques.
4. The minimum uncalled return of 10% for a TSS for income is based on your purchase price of the stock or the current market value, whichever is higher.
5. The greater the uncalled return generated on the TSS for income call sale, the quicker the call will be bought back as the stock price declines. You may select a lower strike price to allow an easier buyback to the extent that the strike price of the call selected plus the call's bid price is > than the current price of the stock.
6. Once a TSS for income call is sold, it should be bought to close at any time a 5% net return can be realized or when the stock reaches 25% of the current cycle, whichever comes first.

Selling High Rule: TSS for income calls must be sold at the high point of the price cycle. This is the point at which the stock price is 75% or greater of the current price cycle. You close out your current position, (buy the call back which creates a temporary loss) and then sell the second to last expiration (which eliminates the temporary loss and generates a profit) and then wait for the stock to cycle down so you can profitably close out the position.

If the stock shoots up, you can potentially exit on the delta effect (the income you will receive from the sale of the price of the stock will be greater than the cost to buy back the option) or you can resort to another, advanced defensive technique, the Surrogate Stock Replacement or SSR which will be covered later.

The bottom line is that you are maximizing call sale opportunities. You are taking advantage of as many movements within the price cycle as possible.

TSS for Income: A covered call management technique used to generate income when the stock price has declined after entry.