Covered calls…sometimes referred to as the secret of the super wealthy. This board is dedicated to an investment strategy using covered calls, covered puts, and LEAP covered calls. We will probably concentrate mostly on covered calls. If you are familiar with the strategy you are way ahead. If not, put aside everything they you may have heard about trading options – the good, the bad, and the ugly - and follow along with a fresh start.
The covered call strategy is basically owning a stock and then selling the option to someone to buy that stock from you at a later date. This is commonly referred to as a 'buy/write'. For doing this you will receive a ‘premium’. Today, February 21st, 2008, you can buy American Express (AXP) for $44.80 per share. There is someone out there right now that will pay you $1.80 per share to have the right to buy those shares from you next month on March 21st.
If AXP is above $45.00 at that time, not only do you get to keep the premium, but you also get to keep the gain from $44.80 to $45.00 – an additional 20 cents. Total gain - $2.00. That is a 4.5% gain in just 29 days. How would you like to earn 4.5% on your money every month? A well managed covered call portfolio can easily give you 2.5% to 5% returns on average every month.
Of course there is a down side too. Covered calls offer you limited upside, and unlimited downside. Therefore you want to sell calls on shares on companies that you feel comfortable with. AXP is not going to go belly up in the month. The selling of the covered call gives you some downside protection. If AXP is selling for $43.00 a share at the expiration of the option contract on March 21st, you still to keep your premium of $1.80 – you still own the stock. You basically broke even (less commissions) and you are ready to sell the April contract. In the market that w e are in now, downside principle protection is critical. Over several months to a year, covered calls can give you amazing downside protection.
The covered call strategy almost requires a different mindset from investing in stocks. One wants to look to the stock bought as an income producing property that you rent for income. I have owned stocks that have given me premium income (rent) over about 18 months that has been equal to the original purchase price of those shares. Try doing that with a house or any other kind of property. This strategy requires much less time than following stock every day. There are just two critical market days each month that you will want to watch - option expiration day – the third Friday of every month. And, the first trading day after that Friday when you want to start selling calls for the next expiration.
Disclaimer – Don’t rely on anything I say. DO YOU OWN HOME WORK. I tried trading options solely in the past and lost my butt. The covered call strategy has worked very well for me but may not for you. Start off slow and easy. This is not a get rich quick scheme. However, this strategy has the potential to give you consistent returns that will far exceed most other investments opportunities available.
Please join us.
Happy trading, Joe Stocks
Interesting sites for Covered calls;