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Covered Calls
Covered calls are done on stocks that have options available. They can be done on many stocks over $5.00. We like to trade them on bouncing stock, but they can be done on blue chips. An option is covered when you own the underlying stock. You sell the call of the strike at or near the money. This is done for the next month out. If you own a 12.00 stock you could sell the 12.50 call. This call might bring you about 50-75 cents. This depends on how much time is left and how close the stock is to the strike. When the call expires you either get bought out at 12.50 if the stock is worth more, or you keep the stock and do it again the next month. I sometimes call this stock renting. You need to buy stock in 100 share increments. Contracts of options represent the option to purchase 100 shares of stock at a set price or strike price. As the stock rises so does the option, we buy the stock on support and sell the call on resistance. Using our bouncing stock example: if the stock is 12.00 and we buy it for that price and it runs up regularly to 14. then we sell the 12.50 strike option for 2-3 dollars. Wow! Now we get some time premium and the difference in the stock price. That's like selling the stock for 15 dollars every time. If we are called out or bought out at 12.50 we get the extra 50 cents. This is over 20% in less then 30 days. If it is done on margin it is over 40%. This can double your money every three months or so. We teach many ways to do this that will maximize the return. This strategy is so safe you can do it in an IRA. I have yet to lose on a covered call play even when the stock went down, but is possible to be hurt on them so be careful! |
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