8 ways to profit with covered calls

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How to profit by trading covered calls.

How to profit by trading covered calls.

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  • 1. Get Rich – Stay Rich Get Rich Investments
  • 2. The covered call trade has always been known as an income strategy as youreceive premium for selling calls against your stock. This is the most popularrationale for implementing this type of trading. However, there are manymore dimensions that can be coupled with covered call trading to furtherenhance the potential for profits. Here is a list of 7 methods to more profitswriting covered call trades. 1. Selling the classic covered call against stock you own. You make money with the time decay of the short call. Usually you sell the near month or next month out so you can continue to compound your money. 2. You can sell out-of-the-money (OTM) calls as your short call. Here you get the call premium and potential for a capital gain as the OTM call offers some upside profits for the stock price to increase. 3. You can make more money on a short call when volatility collapses’ early in the trade and you close the trade. We have all been in covered call trades when after a few days the call option loses value and you find yourself in a very profitable trade. You can close this short call to lock in profits. 4. You can trade the short call as the stock price changes. For example, if the stock price decreases, you can close the short option early for a profit. Then, the call can be written again when the stock prices snaps back to higher levels. This is similar to channeling stocks by trading the short call against stock price changes. 5. You can roll up or roll out the short calls to a higher strike price or to a later expiration month. This allows you to squeeze extra profits out of a stock price rise. 6. You can add option legs to a short call to create spread positions such as a bull or bear call spread. This is good to take profits from a rising covered call trade or a falling stock price. 7. You can add a long protective put to the covered call position as it will increase in value as the stock price decreases. This is usually utilized as protection against stock declines but can create more income when a stock price declines while you are holding a covered call position. 8. You can use LEAPS as stock replacement then sell a short call against it. This creates leverage for potential returns and puts less capital at risk.It is not necessary to use all of these methods when trading covered calls. Itwill be advantageous to the income trader to use more than one method tomake money income from selling premiums. In addition, some of thesemethods can be used to enhance and/or protect your monthly income.Get Get Rich Investments.com Page 2
  • 3. Adding these methods does require more monitoring or your covered callpositions. The advantage is that it adds more potential for profits comparedto the classic covered call trade. It really comes down to how active youwant to be in your income trading each month.Get the Get Rich Monthly Income Newsletter here.Get Get Rich Investments.com Page 3
  • 4. Writing Out-Of-The-Money Covered CallsIf you are bullish on a specific stock, then you should consider writing anout-of-the-money (OTC) covered call. This type of call includes a strike pricethat is above the current stock price. You still get a call premium but it isgenerally less than an at-the-money call. But you also get the potential ofstock appreciation because of the higher strike price of the call sold. Thiscreates a situation for potentially two income streams from one trade.This trading strategy works best when you can confirm the stock being in anuptrend or if the stock is bouncing off a support level. A support level wouldbe something like a 50-day moving average or even a Bollinger Band thathas been stretched on the bottom.The key to this strategy is to be right about the stock price moving higher inthe near future. Due to the OTM call offering fewer premiums than an ATMand having a low delta, they can be slow to lose value on a stock pullback.This strategy should be used in special situations or during a slow movingbull market.Also, you want to avoid this strategy when he stock has gapped up until thenew price range is confirmed. Stocks that gap up usually pull back beforethey stabilize in a new trading range. However, a stock slowing moving up isa good opportunity for OTM writes.This strategy works well when you have a down-day in the stock or market.The stock price decline will usually be temporary down and will bounce backin a few trading days. You need to be sure the market decline is not apermanent correction that will be sustained for months.This is a good strategy for stocks you do not want called away in a flatmarket. You can still get an increased profit if the stock price is above theentry price at expiration. Then, you get an even bigger return if you getcalled out at the higher call strike price.Get Get Rich Investments.com Page 4
  • 5. Writing Deep-In-The-Money Covered CallsThe conservative covered call writer is seeking downside protection andincome from premium. This investor places more value on protecting capitaland is not concerned about their stock being called away. This covered callinvestor will sell calls that are deep-in-the-money (ITM). This is a goodstrategy when the market uncertainty increases and there is increasingworry about a market correction.For example, if Wal-Mart is trading at $53.00 then a deep ITM call will besold at the 45 strike price. This call is $8.00 ITM and provides a 15%downside protection. With a stable stock like WMT, it probably will not gobelow the 45 strike price during a market pullback. In fact, WMT has notbeen below $45.00 in the last three years.The trade-off for selling ITM calls is that the returns will be lower as themajority of the call premium is intrinsic value. The method to the madness isthat these calls offer more downside protection in return to accepting alower time value of premium. ITM call writes can be a very successfulstrategy when used on large-cap stocks during a market pullback.There are many covered call traders that suggests they made a higherreturn over a long time period for several reasons:  It is not that difficult to find a 3% return with 30 days remaining on high quality stocks;  The stocks will be assigned at expiration so you are never stuck with a stock that is down;  ITM calls have a higher delta so they lose value closer to the stock. You can easily roll down your strike price without a loss;  Trading the short call is more profitable due to the high delta. Here trading refers to buying back the call on a price dip and write them again on the bounce back.The ITM writer should concentrate on large-cap, high quality stocks as thereis never a reason to trade poor quality stocks regardless of your strategywith ITM calls. The one item of note is that this strategy is not the best in arising bull market unless you have high risk avoidance to a potential tradeloss.A variation of this trade is to use it when volatility is high such as in theGet Get Rich Investments.com Page 5
  • 6. financial crisis in 2009. The high volatility will increase the amount ofpremium and return. You can use this strategy when there is a pendingevent such as an earnings release but not as a speculation trade. The key isto use this strategy with large-cap, high quality stocks.Get the Get Rich Monthly Income Newsletter here.Get Get Rich Investments.com Page 6
  • 7. Writing Covered Calls With High Quality Stocks Using VolatilityThis is a great strategy because it uses the highest quality stocks that high ahigh volatility. I define a high quality stock as a stock rated 5 stars by theS&P rating agency. As we know, when volatility is high you get morepremium from selling calls against your stock. This will increase your returnon investment for covered writes.Here is how it works:  stock volatility is higher than the market volatility measured by the S&P 500 index (SPY);  stock has high implied volatility to generate good call writing return on investment;  Stock pays an annual dividend whose yield is at least 3% or better.Then, if not called out, you can rewrite the call month after month until youare called away. This strategy will minimize the amount of time used inselecting stocks and managing trades. This will also lower the stressinvolved with covered call trading.To implement this strategy, you should look for:  A low to medium historical volatility between 20-40% but higher implied volatility which tends to generate more premiums;  A historical volatility of 30-60% with similar implied volatility as you will hold these stocks for several months - the high HV will provide more premium each month.  Lastly, do not try this strategy on a lower quality stock just to increase your returns - stay with the 5 star stocks.The use of high quality stocks will lessen the number of potential stocksbecause you have preselected a stock list. The high quality stocks aregenerally blue-chip stocks that pay a dividend. I am not a fan of buy andhold investing but this strategy is an effective way to maximize monthlyincome from investments.Get Get Rich Investments.com Page 7
  • 8. The high quality stocks or blue-chips tend to move less in price compared tosmaller cap stocks. These high quality stocks tend to outperform duringperiods of uncertainty in the markets. This is why we use these stocks in thisstrategy as they can weather the market downturns and rise during a bullmarket.Get the Get Rich Monthly Income Newsletter here.Get Get Rich Investments.com Page 8
  • 9. Trading Covered Calls by Legging InThis strategy is a variation of the out-of-the-money (OTM) covered callstrategy. When you are anticipation a market upturn such as a bounce up oryour stock is in a prolonged uptrend, this strategy may work for this type ofsituation. The legging in strategy is to buy the stock and then wait for theprice to increase before selling OTM calls. The legging in is related to the buythe stock (one leg) before you sell the calls (second leg) at a later date tocomplete the covered call trade.This strategy can significantly increase your returns when the stock pricemoves up rapidly. Then, you have a decision to make about when to sell thecall. Some traders decide that the stock will continue to rise so they do notsell the call. Others may decide the stock is out of gas to move higher sothey will sell an OTM call for additional income.As an example, you may purchase a stock at $52.40. The current month52.50 call strike is selling for $1.00. You can buy the stock at $52.40 andsell the 52.50 call for $1.00 and get an unassigned return of 2.14%. Youdon’t want to lock in your covered call trade for a low return so you wait onthe stock. To leg in to this trade, you would buy the stock and wait until itsprice increases to around $54.00. At this time, the 52.50 call strike price is$2.50. The leg in trader would sell the 52.50 call strike if the stock was outof momentum and poised for a pullback. This would create an assignedreturn of 5.01%. This return is more than double the initial trade with adownside protection to $52.50.The leg in trade more than doubles the unassigned return because theoption premium more than doubled (from $1.00 to $2.50) as the stock priceincreased. The return percentage doubled while both trades were at thesame strike price (52.50). This could be even better if the trader moves theircall strike price to 55 to let a stock continue to run up to a higher price.So what is the trade off for the additional return? Legging-in is a littlespeculative because it leaves the investor without a premium for a shortGet Get Rich Investments.com Page 9
  • 10. time while waiting for the stock price to increase. Additionally, the traderdoes not have the downside protection while owning only the stock withoutselling the call. Lastly, the investor could be wrong and the stock neverincreases in price.The bottom-line is that the trader must have a solid reason for why thestock will increase in price in the short-term. The moment this rationale isproven wrong, the trader must make a decision on how to proceed with thestock they own.Get the Get Rich Monthly Income Newsletter here.Get Get Rich Investments.com Page 10
  • 11. Covered Calls on Market Down-DaysOne strategy to deal with the current market turmoil is called down-daycovered writing. This is based on looking for stocks that are down on a daythat the market is down. This strategy assumes the rubber band reaction ofthe stock bouncing back up when the market move up. This gives the writerthe advantage of buying the stock at a cheaper price than on a market up-day.On a day with a big pullback, you are trading a lower premium for thepotential capital gain of the bounce back price. For example, a stock istrading at $45 and the current month 45 call is priced at $2.10 indicating acost basis of $42.90 and an assigned return of 4.9%. However, on themarket down-day, the stock drops to $43 and the 45 call price drops to$0.90. If you enter this trade by buying the stock at $43 and selling the 45call for $0.90, your cost basis is now $42.10 and your assigned return is now6.9%. If the stock falls short of $45 at expiration, you keep the $0.90 inpremium and write a new 45 call at the next expiration date.The key to this strategy is making sure the stock is trading with the market.Here we will define the market as the S&P 500. Use a chart service such asbigcharts to create a chart with your stock. Then click the compare bottomto add the SPX (S&P 500). You should notice that the stock and SPX have avery similar pattern. If yes, the two are moving in lockstep together and thisis a good candidate for this strategy.This strategy is not about the technical movement of the charts but aboutthe potential snap back movement of the stock. This serves as an exampleGet Get Rich Investments.com Page 11
  • 12. of why covered call traders sell out-of-the-money (OTM) calls to increasereturn on investments.Get the Get Rich Monthly Income Newsletter here.Get Get Rich Investments.com Page 12
  • 13. Covered Calls at ExpirationThere are many variations of the covered call trade. The classic covered callis to select the trade, buy the stock and sell the ATM call. In addition, thereare a number of strategies that are variations of the classic call based ondifferent trading ideas. One variation is expiration writing.The investor will scan for short-term writes in the last two weeks of thecurrent option cycle. The trader is looking for stocks with high premium andhigh return on funds invested. To get high returns over such a short timeperiod usually indicates a high implied volatility and increased risk. When IVis higher than actual volatility, then there is usually a pending event so youmust research these trades very thoroughly.One safer way to do this is to find a stock with higher volatility due to anevent planned in advance. Examine the stock to see when the event date isscheduled. If the event will occur after the current expiration date, then youcan trade in the current month calls. The reason for this is that eventvolatility may increase premiums across both the current month and thenext month option cycles. This is a cool trick that most covered call writershad not heard of before.This is not a risk free trade but it works if you are right about the timing ofthe event expiration being after the current month. The key is to actuallyconfirm the event date and not speculating about when it will occur. Do notjust go by the high volatility in two month alone. If the IV is in line with thehistorical volatility, it may be a great covered call write anyway.Get the Get Rich Monthly Income Newsletter here.Get Get Rich Investments.com Page 13
  • 14. Create Monthly Income with Your Portfolio Get Rich Monthly Investment Plan for only $10.00 per month “Wealth is the ability to fully enjoy life.” – Henry David ThoreauDoes the idea of using an income investing strategy to generate 3% to 5% a month on your fundsappeal to you? That’s more than enough return to beat the historical average of the overall stockmarket.Do you like the idea of confining your investing to only high-quality, conservative stocks,defined as S&P 5-star ranked stocks? Why not leverage the research of the professional researchorganization with decades of experience!How about using a simple strategy to limit your risk in each trade to only a few percent of theamount invested? The key to long-term investing success is tonot have big loses!Do you like to invest in assets that pay monthly dividends with annual yields of 10% or more?These dividends create a portion of your monthly income plan that can create a significantnumber of monthly dividend checks, month after month.If you answer YES to any of these questions, the Get Rich Monthly Investment Plan is foryou!The Get Rich Monthly Investment Plan provides the investor with the following investmentvehicles: 1. A list of covered call trades consisting of high quality stocks such as the S&P 5-star research rating of the best stocks that are recommended as strong buys. These lists are updated each week with select trades added daily. 2. A list of covered call trades using LEAPs (Long-Term AnticiPation Security) as a stock replacement strategy to increase returns. 3. A list of CEFs (closed-end funds) that pay monthly dividends month after month. These investments can pay more than 10% annually and can sometimes be purchased at a discount to net asset value. 4. A list of calendar spreads to use to increase your return while lowering your capital required to trade. Do you want to pay full price for the stock or purchase a call as an alternative?Get Get Rich Investments.com Page 14
  • 15. 5. Low risk investments to minimize market risk and to prevent your portfolio from taking a big lost in such uncertain market environments like we are experiencing today. 6. We have created a strategy called the Blanket Put that will protect your investment from market downturns. The Blanket Put is your safety blanket to protect your portfolio from market downturns. This is worth the membership fee by itself. 7. Access to multiple education resources to better learn how to be a more successful investor. Trades don’t end when you make a stock buy, sell a call, or complete the trade. Here we want members to be educated about how to manage a trade and when to take action.How is the Get Rich Monthly Income Plan different from the numerous other covered callservices?We focus on real stock research such as the S&P 5-star rated stocks rather than a computerprogram that selects trades based solely on return. We do the screening for you. We all want thebest return possible but our Monthly Income Plan only selects the best trades based on numerousvariables such as stock quality, great research, dividend yield, stock volatility, low risk, andmany other indicators that can’t be disclosed here for obvious reasons.The Get Rich Monthly Income Plan diversifies risk by seeking multiple streams of income.You can create monthly income by: covered call trades, covered LEAPS, calendar spread trades,monthly dividend CEFs and dividends from owning high quality, conservative stocks. That is 5streams of income from this simple list as we focus on “cash flow” to the investor to improveyour quality of life.We at Get Rich Investments eat our own cooking. The trades and strategies shared with you arethe same that we use for our monthly income. This is exactly why we can offer this service atsuch a low fee compared to the $100 per month services typically found on the internet.We have more than 20 years experience in the markets including trading covered calls andmonthly income investments. In addition, we have Masters in Business Administration (MBA)from a top business school and other experience in corporate finance and strategy. We haveauthored several books including the original Get Rich – Stay Rich: Investing for MonthlyIncome that is currently on sale at Amazon and other bookstores around the world. It is importantto you that your monthly income is in qualified, experienced investor hands who can be trustedto deliver the best trades.There are no gimmicks, no bait and switch or added fees. We give you all of this for only $10.00per month. You will be charged monthly with no required annual subscription. If you don’t likethe service, you can cancel at anytime. We are convinced that you will like the quality of serviceand continue to make monthly income.Try it today! Get Rich Monthly Income Newsletter – $10.00 per monthGet Get Rich Investments.com Page 15
  • 16. Disclaimer:This Special Report is published by G3 Marketers LLC, which operates the famedGet Rich – Stay Rich: Investing For monthly Income brand andgetrichinvestments.com website and publishes the get Rich Monthly IncomeNewsletter. Neither the author, G3 Marketers LLC, Get Rich Newsletter norany person associated with them is a broker or investment adviser, nor is any ofthem a professional securities analyst; and none of them recommends thepurchase, sale or holding of any security. Your use of any information or strategyappearing in this book, in the Get Rich NEWSLETTER or on getrichinvestments.comis solely at your own risk.We urge you to do all requisite analysis and properly plan each trade prior toplacing any trade and to manage each open trade effectively. Trading stocks andstock options involves risks, and no strategy can eliminate them entirely. Moreover,poor trading decisions, frequently the result of greed or panic, are responsible formany losses in covered call writing, and only you can prevent them. Neither theauthor, Get Rich Newsletter, getrichinvestments.com nor any person associatedwith them will be liable to any person for any losses or damages, whatsoever,monetary or otherwise, alleged to arise from the content of Get Rich newsletter,any Special Report or the use of any strategy or information discussed ongetrichinvestments.com.© 2011, G3 Marketers LLC. All rights reserved. Unauthorized reproduction is strictlyprohibited. Information is based on best available resources. Opinions reflect judgmentat the time and are subject to change.Get Get Rich Investments.com Page 16