Rising markets are good for investors who own long stocks. And covered calls are good for creating monthly income. Buy why would you want to set a limit on your upside (by writing a covered call) when stocks are going up? Well, there are a few reasons. Perhaps you are investing around a news event? Or trading on margin? There are valid arguments to be made for increasing your safety net and taking a potentially smaller gain. Here are some of the reasons why you may want to consider selling covered calls as stocks are going up:

Take some gains. After a nice increase in stock price it is wise to either reduce your position, or write some calls against it so that if the stock gives back some of its gains you can capture some from the call premium. These two ideas can be combined by selling covered calls that are ITM (in the money) on the portion of the stock you were planning on selling 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.

Recurring income. You may have some core holdings that you plan to own for a while. Well, why not write some out of the money calls on them to generate some extra income (even if the stocks are rising)? You can set the upside potential as high as you like (by choosing a high strike price). Depending on how far out of the money you choose, you may need to sell several months worth of time premium instead of one-month in order to cover the transaction costs.

Velocity. Sometimes a stock has risen quickly and the momentum investors are piling in. That kind of activity usually increases the call premium, making them very attractive to sell. In these cases you may want to write a DITM (deep in the money) covered call. But it’s important to pay attention and watch the stock closely because momentum stocks are volatile. It is best to keep the time to expiration short (i.e. sell the near month, and not several months out).

News items. Prior to a news announcement (earnings or product announcements) the option premiums almost always increase. Rather than buying into the pre-announcement volatility, consider selling the volatility by selling 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 trade 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 a smaller loss than if you had just held the stock outright.

To learn more about covered call strategies, check out Born To Sell. If you’re an income investor you should subscribe to the free stock option newsletter.