How to use Covered Calls
It is best to use it when the stock you own is up-trending or sideways trending. Let's use the example below, saying you own this stock. In the last 18 months it went from 22.5 to 25. Not much action going on, a sideway trends, where's the money? It's hidden in a strategy called Covered Calls. To get it you need to know how to write covered calls. It is not hard. Most stocks have call options on them. These allow traders to pay a premium to buy a stock at a set price by a certain expiration date. To do this they have to pay a premium. Now you as a stock holder can take advantage of this by selling out of the money calls and collecting that premium. This can force you to set a limit to how much you can make, but produce a monthly cash flow as you sell the options month after month.
We will also say on average you got $.30 per call you sold. Let's see....you owned this stock for 18 months and sold a call every month, Your stock did not move up sharply so chances are you would have kept your stock.
So you would have made around $5.40 on call premiums. That's a 24% return in addition to the 10% you made on the stock. Wouldn't you rather have 34% than just 10%? This strategy can greatly increase your monthly cash flow. However, there is a drawback. If you sell the $30 call on a stock that is $25 and it skyrockets to $38 you will get called out and have to sell at $30. So you lose some profit potential, but keep monthly cashflow. There is another way around the trade, if you insist on keeping the stock simply re-buy the Call for a loss. Instead of thinking that you sold a $38 stock for $35 it may be better to think of the trade as buying a stock for $25 and selling it for $30.30 in this case. When to use it? There are many people who will place these trades in every market environment. I personally love this strategy during volatile markets. When the market is going crazy and you cannot determine what is going to happen, you can always grap some Value stocks and sell some calls to wait it out. You can also sell in the money covered calls as a way of reducing risk. Have A Great Story About This Topic?Do you have a great story about this? Share it!
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