Covered Calls A Godsend in a Flat or Falling Stock Market
Below is a MRR and PLR article in category Finance -> subcategory Investing.
Covered Calls: Your Ally in a Flat or Falling Stock Market
Generate Income from Your Stocks by Writing Calls
Many retail investors aren't aware of the potential to create cash flow from their stock holdings using covered calls. When I mention that I generate extra income, hedge my positions, and set strict sell disciplines through this strategy, people often think I'm joking. I first learned about covered calls from Scott Masse, a stockbroker at Masse Wealth Management in Smithfield, RI. Over a few drinks, Scott explained this conservative strategy, which is surprisingly the only options strategy permitted for IRA investments at most major brokerage firms.
Understanding Covered Calls
Covered calls are similar to selling an option on real estate. Imagine offering someone $10,000 for the right to buy their property in six months at a predetermined price. If you don't exercise that option, the owner keeps the money, and both parties move on.
In the stock market, if I purchase 1,000 shares of ABC OIL at $10 each, and the stock rises to $11, I can sell someone the option to buy these shares from me in six months at $12.50. For this right, the buyer pays me a premium?"let’s say, $0.50 per share or $500.
That $500 goes directly into my brokerage account, while an option position appears on my statement. I can't sell the stock before six months unless I repurchase the option. The option price may fluctuate, so I typically hold my stocks until the option's expiration.
Possible Outcomes
After six months, two scenarios are possible:
1. If the stock price exceeds $12.50, the buyer exercises the option, and I'm glad to sell since I bought at $10.
2. If the stock remains below $12.50, the option expires worthless for the buyer. They won't exercise their option since the market price is lower.
In either case, I can write new calls and start the process again.
Benefits of This Strategy
1. Hedging: I hedged my position by $500 or 5%.
2. Setting a Sell Price: I established a clear selling price of $12.50.
3. Generating Income: I earned additional income to enjoy or reinvest.
Since the early 2000s market downturn, this strategy has been a lifeline, helping me navigate challenging market conditions.
A friend of mine, a computer programmer, shares my passion for covered calls and has developed software currently in beta testing. As a tester, I've found this program invaluable, saving me hours of research and helping focus on 5-10 natural resource stocks to add to my portfolio each quarter. In future articles, I'll share my picks and income results from this strategy, along with a link to the option software.
Final Thoughts
Remember to fully understand your investments and consult with a professional or financial adviser before making any decisions with your hard-earned money.
You can find the original non-AI version of this article here: Covered Calls A Godsend in a Flat or Falling Stock Market.
You can browse and read all the articles for free. If you want to use them and get PLR and MRR rights, you need to buy the pack. Learn more about this pack of over 100 000 MRR and PLR articles.