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.

An exchange traded fund (ETF) is a basket of assets that trades like a single stock. Many ETFs have options available so you can use them for covered calls. They make sense for covered calls because of the inherent diversification they provide (especially true in smaller accounts). Because of the way ETFs are constructed, there is no single stock risk. If one of the stocks that makes up the ETF drops dramatically then the effect will be felt less by the ETF that contains that stock than by the stock itself.

Some ETFs track specific indexes, allowing an easy way to trade the index. For example, the symbol IWM represents an ETF that is comprised of two thousand stocks that make up the Russell 2000 index. When you buy IWM you are buying a collection of these 2000 stocks. Other popular ETFs include QQQQ (NASDAQ 100) and SPY (S&P 500). And there are ETFs to track specific countries, sectors, or commodities. For example, EWJ tracks Japan, EWZ tracks Brazil, XLF tracks financial stocks, and GLD tracks gold.

The most common way to own gold is with the ETF symbol GLD. Billions have been invested in it. Although it doesn’t pay dividends, by using covered calls you can create dividend-like cash from GLD, too. You can buy any one of several gold-based ETFs (although the most logical choice is GLD) and then write covered calls. Other choices (besides GLD) include DGL which has very small open interest, and UGL which is 2x leveraged and therefore pretty volatile. Given the liquidity of GLD, and the large open interest in the options for GLD, the best choice for gold covered calls is GLD.

Everyone needs some exposure to emerging markets for proper diversification. But information in other countries is hard to come by, inconsistent, and in a format that is difficult to digest. So it’s another good case for ETFs. The most popular emerging market ETF is EEM (iShares MSCI Emerging Markets Index Fund), which has nearly $41 billion in assets and is highly liquid. Another choice, if you want to limit your exposure to just China, for example, would be to use iShares FTSE/Xinhua China 25 (FXI).

Despite all the positives of using ETFs for covered calls, there is one kind of ETF that you should not get involved with, and those are the leveraged ETFs. They are 2 or 3 times more volatile than a their unleveraged counterparts. You can spot leveraged ETFs because they usually have words in their name like “double”, “2x”, “ultra”, “triple”, “3x”, or “leveraged”. Traders who day trade love leveraged ETFs. Good for them. But that does not mean they are appropriate for covered calls written by conservative income-oriented investors (they’re not!). They can be tempting because the high premiums they offer. But the extreme volatility is the reason for those high premiums! Better to stick with unleveraged ETFs for covered calls.

Covered calls vs bonds. If you’re tired of earning tiny bond interest, try call premium instead. Visit borntosell. What type of investor are you? Growth investor or income investor?