Covered call strategies are liked by options sellers because of their ability to bring in consistent cash flow over time. In markets that climb or trade sideways, the call option premium delivers the income, while in falling markets, this exact same premium offsets the losses. Shareholders have used covered calls for in excess of 30 years. They're so well liked that in 2002 the Chicago Board Options Exchange launched the first major benchmark index for covered call strategies - the CBOE S&P 500 BuyWrite Index (code BXM).

To ensure optimal returns from covered calls, it's generally recommended to apply them to stocks and shares with a significantly higher historical volatility. Although this seems to be somewhat counterintuitive, studies have shown and even Warren Buffett has commented that there is "no correlation between beta and risk". The main reason why these volatile stocks can be so appealing is that they're capable of returning 40%+ each year - not really on the grounds that stock price is about to rise dramatically but because the overpriced option values reflect the anticipation for underlying stock volatility.

But covered call techniques also carry a measure of risk therefore we ought to employ the right course of action to different market conditions. The worst case scenario is when you acquire a stock, write out-of-the-money covered calls at exercise prices higher than the buying price and then the very same stock price takes a big plunge. In such cases, the option premium you've just received will probably not cover the capital loss on the shares themselves.

So what can you do?

Your original sold OTM calls will be significantly devalued by now, so you could repurchase them 'for a song' and then sell additional call options at a lower exercise price. This would bring in even more premium to offset the capital loss on the shares. However, if you're relying on covered call methods for a regular source of income you won't make money on those shares this month and should the price continue to fall, you may even have to accept a loss.

So although selling OTM covered calls is ideal for a sideways or bullish outlook for any given share, it may not be the best plan when they're around their price peaks. You could purchase protective OTM put options at strike prices beneath the share purchase price but this would lower your overall income. Protective puts are a more effective choice if you're more "investor" than "trader" minded and plan to retain the shares for some time.

Still, in a bullish trend, OTM covered calls give the most beneficial result - you receive option premium and also a capital gain on the shares themselves. Nevertheless for this plan to be effective, you should use the best research tools to raise the probability of success.

What About a Bear Market?

In cases where the overall market has turned bearish, you can make a consistent income making use of the appropriate covered call techniques. In such cases, the most effective alternative would be to sell IN-the-money call options over your stocks or commodity futures. The intrinsic value in your sold call options will work to your advantage should the underlying price fall. If these options become OUT-of-the-money you will be able to buy them back at a much cheaper amount than you sold them for, thus making a profit. At the same time the additional premium you have received from the ITM options will furnish a far greater buffer against falling share prices than out-of-the-money premiums.

In the event the stock price has fallen substantially (but not under your ITM call option strike price) you 'buy to close' the sold options and without delay sell MORE in-the-money calls with a still lower strike price. The earnings you make under such conditions are thanks to the 'time value' of the options which, if prices at the time are volatile could also include some strong implied volatility to enhance your returns.

And for Consolidating Markets

If you've noticed a share price which is caught in a range or sideways channel and not likely to move much up or down in the short term, it's very likely that option valuations are going to be under priced on account of low implied volatility. This will reduce your potential earnings, but that's what you exchange for lower perceived risk. For stocks like these you should consider writing AT-the-money call options on the stock. You can expect to receive more premium than for OTM calls and because the stock price isn't really going anywhere, you simply 'rinse and repeat' each month until things change.

You can search for these kind of stocks using a good stock and options screener, which most decent brokers incorporate with your account.

Making consistent returns from covered call strategies is simply a matter of identifying what risks and returns you're comfortable with and then implementing the most suitable method.