GENERATE INCOME WRITING COVERED CALLS
October 5, 2009
Writing covered calls is becoming increasingly popular with active individual investors. When used properly, covered call writing can be an effective strategy for income and growth. The
basic covered call strategy is to generate income by selling call options
on stocks that you already own. The Active-Investor.com strategy focuses on buying stocks whose
near-term call options exhibit high premiums, usually greater than 10%
of the stock price. The procedure is to first buy the stock and then immediately sell the "covered" call option. By writing near-term, slightly out-of-the-money calls against a stock
that you already own, two outcomes are possible when the options expire:
1) The stock price is at or above the option strike price:
In this case, the options will ordinarily be "exercised" by the buyer (i.e. your
stock is "called away" from you by the holder of those options at the strike price
of the options). Your profit on the transaction includes the premium that
you received for writing the options, plus the difference between the strike price
of the option and your purchase price of the stock. You give up any further participation in the
upside of the stock price above the strike price of the option
2) The stock price is below the option strike price:
COVERED CALL STRATEGY
At expiration, "out-of-the-money" call options will ordinarily expire worthless to the
option owner, who is unlikely to "call" the stock away from you for a higher price than
it would cost on the open market. Therefore, in addition to still owning the underlying
shares of stock, you pocket the premium that you received for selling the call options.
If the stock price has fallen since purchase, your loss has been cushioned by the income
from the option. Furthermore, you now have the opportunity to earn still more from the
stock by writing covered calls AGAIN and AGAIN, until you either sell the stock or it
gets "called away" from you by an option holder.
Writing covered calls works well in bull markets and flat markets. Writing covered calls can
even cushion losses during a bear market. Analytical
tools are used to select covered call options that will provide at least
a 10% return over a relatively short period of time, usually less than 2 months.
Most covered call research provided to the subscribers is for stocks that are
priced under $30.00 per share. This is important because stocks must be bought
in blocks of 100 shares in order to write a call contract. Active-Investor.com subscribers are provided with research on 3 covered call candidates each and every week. Other sites containing this information alone
can cost much more than the one, all-inclusive subscription to Active-Investor.com.
The criteria for selecting covered call options can be summarized as follows:
- Stock costs less than $30.00 per share.
- Out of the money call premium is greater than 10% of the stock price.
- Call option has sufficient volume and open interest.
- Call option to expire in less than 2 months.
- Stock has positive daily price momentum.
Subscibers can access a weekly table showing the following information on
that week's top covered call options:
- Company Name
- Stock Symbol
- Closing Stock Price
- Recommended Call Option (Month of Expiration / Strike Price)
- Annualized "Static" Rate of Return (Option not exercised; stock price unchanged at expiration)
- Annualized "Called Out" Rate of Return (Option exercised; stock called away from you)
This method of investing is based on Active-Investor.com's proprietary research and years of practical trading experience. To help
you decide what type of investing is most suitable for you, consult your personal investment
advisor. For additional background, you may also want to browse through the online Bookstore.
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