Why sell covered calls?
- By Timothy Leary
- Published 04/23/2010
- Finances
- Unrated
Why sell covered calls?
An investor who understands how to sell (write) covered calls an earn 4% a month with very low risk. This amounts to a 48% annualized return, and if compounded and all profits reinvested, 60%! Returns in the 5% to 8%, and higher a month are certainly doable if the market and stock is rising.
The biggest reason to sell covered calls is that they produce instant income. Think of it as collecting rent on your favorite stocks. You can literally create a paycheck in minutes. A $50,000 portfolio compounded at 4% monthly yields $524,288 in 5 years!
You may be wondering when is the best time to sell a covered call. The answer is almost any time! Covered calls work in any market and there are strategies for bull markets, bear markets and sideways markets.
Are covered calls risky? Covered calls are safe and have low risk. They can be combined with puts for downside protection or you can sell at-the-money or in-the-money calls for higher premiums that lower your cost basis. The time required to sell covered calls is minimal. This is not day trading!
Recipe for success
• Covered call sellers depend on great stocks. Pick stocks with strong earnings per share (EPS) and be familiar with the stock’s trend. There are some high quality covered call screeners available to help select the best stocks.
• Do not sell a call just because you like the high premium. This is where many inexperienced covered call writers go wrong; they see a tempting premium and just jump right in. If you pick a stock that is incredibly explosive, you could be down $5.00 on the stock before you know what happened.
• Know the current stock market trend, your stock’s trend, any upcoming news like earnings that may make things a little unpredictable.
• Select stocks paying regular dividends 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 defensive put strategy when you sell covered calls for the ultimate in protection. If the stock tanks, you still make money!
What are the requirements for success?
Profitability goes hand-in-hand with skill and knowledge; all of which can be acquired. Time must be allocated to learn the methodology, ask questions, and get help where needed.
There are many valuable resources. As a trader, it’s important to really understand that we can no nothing to control or beat the market. If a surfer is on a wave and it’s not going his / her way, they get off and find another one!
That’s what good covered call writers do. If for some reason the trade is not performing, then you mange it accordingly, either using a repair strategy or just closing out and live to trade again. Understanding how to sell covered calls can bring you a huge peace of mind; the ability to create your “paycheck” every month no matter what without worrying about the economy, your job, social security or the world for that matter.
The biggest reason to sell covered calls is that they produce instant income. Think of it as collecting rent on your favorite stocks. You can literally create a paycheck in minutes. A $50,000 portfolio compounded at 4% monthly yields $524,288 in 5 years!
You may be wondering when is the best time to sell a covered call. The answer is almost any time! Covered calls work in any market and there are strategies for bull markets, bear markets and sideways markets.
Are covered calls risky? Covered calls are safe and have low risk. They can be combined with puts for downside protection or you can sell at-the-money or in-the-money calls for higher premiums that lower your cost basis. The time required to sell covered calls is minimal. This is not day trading!
Recipe for success
• Covered call sellers depend on great stocks. Pick stocks with strong earnings per share (EPS) and be familiar with the stock’s trend. There are some high quality covered call screeners available to help select the best stocks.
• Do not sell a call just because you like the high premium. This is where many inexperienced covered call writers go wrong; they see a tempting premium and just jump right in. If you pick a stock that is incredibly explosive, you could be down $5.00 on the stock before you know what happened.
• Know the current stock market trend, your stock’s trend, any upcoming news like earnings that may make things a little unpredictable.
• Select stocks paying regular dividends 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 defensive put strategy when you sell covered calls for the ultimate in protection. If the stock tanks, you still make money!
What are the requirements for success?
Profitability goes hand-in-hand with skill and knowledge; all of which can be acquired. Time must be allocated to learn the methodology, ask questions, and get help where needed.
There are many valuable resources. As a trader, it’s important to really understand that we can no nothing to control or beat the market. If a surfer is on a wave and it’s not going his / her way, they get off and find another one!
That’s what good covered call writers do. If for some reason the trade is not performing, then you mange it accordingly, either using a repair strategy or just closing out and live to trade again. Understanding how to sell covered calls can bring you a huge peace of mind; the ability to create your “paycheck” every month no matter what without worrying about the economy, your job, social security or the world for that matter.
Timothy Leary
Tim Leary is a full time trader and investor who sells covered calls monthly earning 3% to 5% in bull, bear and side ways markets. Get a free 50-page Expert Covered Call Strategies report at http://www.mycoveredcallwriting.com
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