There is much misunderstanding on Covered Calls. Most 'pundits' feel that it is a very conservative way of eking a little more out of your existing stock holdings; Well, it is certainly that - but it is much, much more - if approached diligently and intelligently.
This is not a 'Home Run' Strategy - We will never hit it out of the ball park - those are dollars for another segment of your portfolio.
This strategy strives for successive, non-dramatic hits. Have you ever noticed that baseball teams - that win consistently - consist of lots of base hits - and only rarely has a huge home run hit. Well, that is what covered calls consist of - but a steady stream of them!
This is the kind of record that pays for the cars, sail boats, and European vacations - without tossing and turning in bed at night - wondering if that 'tip' will pay off.
It is a well known fact that investors who have a plan - and work the plan - are immeasurably better off than those who rely on news tidbits, and buy whenever there is a well known personage who is recommending a particular stock.
Covered Calls consist of very simple basic components: You have a stock - and you sell the right to have someone buy the stock from you - at a specific price - within a specified time.
Pretty simple, isn't it? You own XYZ stock - and it is selling at $7.50 - and you sell the right for someone to buy it from you if it reaches $10.00. The right to buy it from you costs the person a premium - and that is money that will go to you. Let's say the price to reserve that right to buy it from you is $1.50.
Now, let's look at this. You have a $7.50 stock; Someone is willing to pay a premium because he/she thinks that it is an explosive stock - and he/she thinks it is a bargain to pay $1.50 for the right to buy it from you.
If the stock stays at $7.50 - $8.00 (or somewhere around there) you have made the difference between your $7.50 and $8.00 (if that is where the stock is at the expiration date) - PLUS - the $1.50 you took in. That would be.50 + $1.50 = $2.00. A nice percentage return - 26%! Not boring anymore, is it?
The holdings are usually 3-5 weeks.
Now, suppose your $7.50 stock drops to $6.50: That would be a 13% loss!
But, remember, you have sold the right to buy it from you at $1.50 - (If the stock increased to $10.00 - which obviously it hasn't in this case) you have now brought in $1.50 - added to the diminished stock of $6.50 - You now have $8.00 total - a gain of 6.7% - instead of the 13% loss - as described above!
There are many scenarios one may look at - but, remember this, the strategy of Covered Calls is not a boring, 'eking a little more out of the stock', but, rather is a dynamic strategy which can give you - a very handsome return!
If, it is done intelligently, diligently, and boldly!
R. Parker has been trading for 10 years - and has grown weary reading 'Investment Letters' which devote a substantial time regaling us about their vacations, or their belief on the state of the world - or telling us little homey stories about their pets, children, or their latest visit to Singapore, visiting with the president of this, or that company - and getting great 'inside information', which may be interesting, but almost always - of no immediate use by us - as investors.This is not a 'Home Run' Strategy - We will never hit it out of the ball park - those are dollars for another segment of your portfolio.
This strategy strives for successive, non-dramatic hits. Have you ever noticed that baseball teams - that win consistently - consist of lots of base hits - and only rarely has a huge home run hit. Well, that is what covered calls consist of - but a steady stream of them!
This is the kind of record that pays for the cars, sail boats, and European vacations - without tossing and turning in bed at night - wondering if that 'tip' will pay off.
It is a well known fact that investors who have a plan - and work the plan - are immeasurably better off than those who rely on news tidbits, and buy whenever there is a well known personage who is recommending a particular stock.
Covered Calls consist of very simple basic components: You have a stock - and you sell the right to have someone buy the stock from you - at a specific price - within a specified time.
Pretty simple, isn't it? You own XYZ stock - and it is selling at $7.50 - and you sell the right for someone to buy it from you if it reaches $10.00. The right to buy it from you costs the person a premium - and that is money that will go to you. Let's say the price to reserve that right to buy it from you is $1.50.
Now, let's look at this. You have a $7.50 stock; Someone is willing to pay a premium because he/she thinks that it is an explosive stock - and he/she thinks it is a bargain to pay $1.50 for the right to buy it from you.
If the stock stays at $7.50 - $8.00 (or somewhere around there) you have made the difference between your $7.50 and $8.00 (if that is where the stock is at the expiration date) - PLUS - the $1.50 you took in. That would be.50 + $1.50 = $2.00. A nice percentage return - 26%! Not boring anymore, is it?
The holdings are usually 3-5 weeks.
Now, suppose your $7.50 stock drops to $6.50: That would be a 13% loss!
But, remember, you have sold the right to buy it from you at $1.50 - (If the stock increased to $10.00 - which obviously it hasn't in this case) you have now brought in $1.50 - added to the diminished stock of $6.50 - You now have $8.00 total - a gain of 6.7% - instead of the 13% loss - as described above!
There are many scenarios one may look at - but, remember this, the strategy of Covered Calls is not a boring, 'eking a little more out of the stock', but, rather is a dynamic strategy which can give you - a very handsome return!
If, it is done intelligently, diligently, and boldly!
What we will do is say: Buy this - and here are your likely parameters of returns.
