Bull markets are good for investors who own long stocks. And covered calls are good for generating monthly income. Buy why would you want to set a limit on your upside potential (by selling a covered call) when stocks are rising? Well, there are several reasons. Maybe you are trading around a news event? Or trading on margin? There are legitimate arguments to be made for increasing your safety net and taking a possibly smaller gain. Here are some of the reasons why you may want to consider writing covered calls as the market is are rising:

Taking some off the table. Don’t be too greedy. Afteryou’ve had a nice run in stock price it is prudent to either (1) sell a portion of the stock, or (2) write some calls against it so that if it gives back some of its recent gain you can capture some profit from the call premium. Often these can be combined by selling covered calls that are in the money on the portion of the shares you want to sell anyway, as a way to get a bit more profit from the position. Or, if you’re still very bullish then try selling some near-term out of the money covered calls.

Monthly income. If you have core positions that you are planning to own for the long-term then why not write some out of the money calls on them to generate some extra income (even if they’re rising in a bull market)? Depending how far out of the money you choose, you may need to sell several months worth of time premium instead of near-month (to cover the commissions for the trade).

Momentum. Maybe a stock has risen more than the market recently and the momentum investors are doubling down. In doing so they usually increase the call premiums to where they’re just too juicy to not try a deep in the money buy-write (eg. LULU, NFLX). These can be highly volatile so it is probably wise to keep the durations short (i.e. sell the near month, and not 3-6 months out).

News items. Prior to a scheduled news announcement (earnings or product announcements) the option premiums usually increase. Rather than buying into the this volatility, consider selling the volatility by writing covered calls. The amount ITM or OTM (in the money or out of the money) should match your outlook on the news.

Borrowing. Using margin to invest in stocks can be dangerous. You can experience quick losses if there is a sudden move against you. One way to increase your safety cushion is by writing DITM (deep in the money) calls against your holdings. You may still have losses if there is a quick move down, but the intrinsic value and time premium should buy you enough time to close out the position if you need to with smaller losses than if you had just held the stock outright.

This insight on covered call trading is brought to you by Born to Seel. Want some extra dividends? Try selling calls against your stocks and etfs.