Selling Covered Calls One of Investings Greatest Income Secrets?

Selling covered calls is probably one of the best ways to add extra income to your portfolio.
The strategy I'm talking about is an "options" strategy and is probably less risky than owning ordinary stocks, it offers high returns and low risks.

The technique is called selling covered calls which is also know as writing covered calls. This is a particularly good strategy when interest rates are rising and when inflation is imminent or while your waiting for the economic recovery. But you want to make sure you choose solid stocks, not the speculative type that can drop 50% in the blink of an eye. It is a strategy that I use for my portfolio to boost my returns. In fact this strategy is considered safe enough for your IRA portfolio.

So how does this strategy work? Essentially you are selling someone else the right to buy your stock for a set price and at a set time in the future and collecting a premium for doing so.

Here’s an example of a recent trade I made. I bought Coca Cola (KO) at $42.70 and sold the May $45 call @ $1.55 which paid me a premium of $155.00 for each contract I sold. Options contracts are only sold in lots of 100 shares, so if you have 100 shares you can sell 1 contract, if you have 500 shares you can sell up to 5 contracts, etc. My cost for KO is now $41.15 which is the $42.70 purchase price minus the premium of $1.55.

So if KO goes to $45 or more by option expiration I will have to sell my shares (it will be called away) @ $45 and I will have a profit of $385.00. If KO is less than $45 at time of expiration I get to keep my shares and the entire premium of $155.00. I can then sell another covered call and receive another premium and thus reduce my overall cost even more. As long as KO remains above $41.15 I will have a profit. Oh, I almost forgot to mention that I also collected a nice fat dividend during this time, as the owner of the stock you also get any dividends payable during the option period.

The above example has the potential return of 9%+ in approximately 60 days. So selling covered calls can produce potential annual returns of 15 - 25% or more.
This type of strategy will give you the premium up front, a chance for a capital gain and helps limit your downside.

There are 2 downsides to selling covered calls that you need to be aware of, one is, if your stock tanks, then the premium you received probably won’t do much to help offset the loss you face. In this case you will need to buy back your call and sell your stock before your loss gets to big. To avoid these potential large losses you can get the FREE Report “7 Deadly Mistakes People Make When Trading Options” The other pitfall you face is having your stock skyrocket and giving up enormous gains. But with this strategy were looking for solid income not huge capital gains.

You should probably only sell calls against stocks that you wouldn't mind selling at the agreed upon price. If the stock moves higher later, do you really care? You’ve achieved your goal of capturing the income you were after.
Just remember to start with the proper stock selection and keep in mind were not buying risky options, that’s for traders and speculators. Most options expire worthless so were going to be on the other side this time. We’ll let someone else sit there with that deteriorating asset.

Too get started using this strategy you will need to check with your broker to make sure your account is approved for selling covered calls. If you would like to learn more about options trading check into the Options University. Or get the Free Report “7 Deadly Mistakes People Make When Trading Options”

Good Investing.

TC

FISCAL POLICY or FISCAL IRRESPONSIBILITY?

Thanks to the government’s current fiscal policy, its economic stimulus and relief programs, aka TARP etc. It’s pouring huge amounts of money into the economy in an effort to curb the current recession. Thus we are looking at an astronomical budget deficit of $1.5 to $2 trillion dollars for fiscal 2009. What was once a few million dollars is now a few billion here, and a few billion there, and has us looking at a total national debt of $10 trillion dollars plus (that’s more zero’s than I can comprehend) and it’s growing daily. How are we ever going to pay the interest on that debt let alone pay it all off. If that doesn’t scare you, I don’t know what will?

In the real world when you spend more than you take in you end up going bankrupt, but the US government doesn’t have that problem, they just crank up the printing presses and increase the money supply by printing more dollars. In the end this leads to higher inflation and destroys your purchasing power. For every dollar the government prints the dollars you hold are worth less (did you catch that worthless!).
The inflation rate may not be a problem right now, but higher inflation is certainly not too far off.

So how do you protect yourself from this calamity? You should look at some hard commodities like gold, silver, oil, etc. You can buy coins, bars, or one of the ETF’s that hold these assets.

Good Investing

TC

An Investment Strategy for the Intelligent Investor

Here's an investment strategy that everyone should consider especially if you are like me and self directing your retirement portfolio, or your investment advisor has let you down and your returns are less than stellar. Then join the crowd, we have probably all suffered large losses in the recent stock market collapse, at least more than we should have, especially if we had all followed our trailing limit stops. What’s this you say, trailing limit stops, what are they? A trailing limit stop is merely a stop loss. The idea is to keep from loosing large amounts on any investment you make.

If done correctly it should keep you from ever loosing more than 1% of your total portfolio or retirement funds. The first thing you should consider is position sizing. If you never invest more than 4% of your total portfolio in any one investment and if you set a trailing stop of say 25%, then that would be equivalent to 1% of your total portfolio.

Here’s an example of a trailing limit stop, if you buy XYZ stock at $50 and it goes to $100 and you have set a 25% trailing stop, then you should sell it if it closes below $75, this way you have protected your profit and you can ride your winners for all their worth and thereby increasing your returns. Now lets say that same $50 stock you just bought goes down and you have a 25% trailing stop loss, then you need to sell if it goes below $37.50 figured by multiplying .75 x 50 = $37.50. You may not have made money but you kept from taking a much larger loss in hopes that the stock would return to $50.

Something to keep in mind if you loose 50% on a stock it will have to go up 100% for you to break even. Take the example above if your $50 stock looses 50% and goes to $25, for that to go back to $50 would take a 100% move $25 x 100% = $50.
You can set your stops even tighter if you wish, at say 15 or 20% if that makes you feel more comfortable. This unfortunately is not a set it and forget it strategy. You don’t have to check your stocks daily but you should check them at least weekly.

It takes discipline to execute this strategy, even the most sophisticated investors have trouble with this, but nobody takes care of your money as good as you do , or as good as you should!
One last thing always keep your stops private, never enter your stops into the market or tell your broker what they are, market makers can see your stops and can manipulate the pricing to their advantage and possibly pick up your stock for a bargain.
Until next time.


Good Investing,

TC