Investors who sell covered calls know it’s a proven strategy that every-day investors as well as large hedge funds use to generate income on a monthly basis. It’s not unrealistic to generate 3% to 5% per month.
An experienced investor who knows the ins and outs of selling options (also called writing covered calls) can earn 4% a month without taking much risk; that’s a return 48% annualized, and if compounded, meaning no money is withdrawn and all profits reinvested, 60%! Higher returns in the 5% to 8%, and sometimes 10% a month are certainly possible if you get a stock in an uptrend and are capturing premiums as well as stock appreciation.
1. When you sell a call option you create CASH FLOW! If you are a “buy and holder”, then collect some easy monthly rent and super size your returns!
2. Selling covered calls is lucrative; you can earn 3% to 5% per month. A $50,000 portfolio compounded at 4% monthly yields $524,288 in 5 years!
3. You can sell options in any market; there are strategies for bull markets, bear markets and sideways markets.
4. Covered calls are conservative with limited risk; they can be combined with puts for the ultimate in downside protection or sell at-the-money or in-the-money calls for fatter premiums that lower your cost basis.
5. The process is not time consuming; no staring at your computer for hours a day.
The Rules of the Game
* Successful sellers/writers depend on quality stocks. Pick rock-solid stocks with strong earnings per share (EPS) and know where the stock’s support and resistance points are located. There are some high quality covered call screeners available.
* DO NOT be seduced by fat, juicy call premiums! This is where many inexperienced investors go wrong; they see a whopper of a premium and go for it. If you pick a stock that is incredibly volatile, you could be down $5.00 on the stock before you know it.
* Plan your trade and execute. Know the current stock market trend, your stock’s trend, any upcoming news like earnings that may make things a little unpredictable.
* Consider dividend-paying stocks to help offset margin interest or just boost returns. Stocks like Merck pay almost a 5% dividend and are volatile enough to have nice call premiums. This is the best of both worlds.
* Use a protective put strategy for the ultimate in protection. If the stock tanks, you still make money!
What does it take to write covered calls profitably month after month?
* Successful covered call writing requires knowledge and skill; all of which can be acquired.
* You need to be focused to learn about the process, ask questions, and get help where needed.
Fortunately, there are a lot of resources. As a trader, it’s important to really understand that we can no nothing to control or beat the market. That may sound odd; the market is there every day doing its thing. If a surfer is on a wave and it’s not going his / her way, they get off and find another one!