Covered Calls - A Conservative, Income Based Investment Strategy
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In these stressful financial times many of us are tempted by the 'get rich quick' schemes that gain prominence in the popular press and the media, but the collective consciousness is much more aware of the old sore "If it looks too good to be true..." If, like many investors, you have a rational fear of losing your savings or having your retirement fund drift off into the ether, what are the alternatives, if there are any? Simple answer; "Yes!" and they take the form of what are known as a 'covered call'. Most of us are not inherently 'gamblers' we simply want our hard-earned savings to accumulate some interest for us and not to line the pocket books of others. So what we are looking for are conservative schemes that will allow us to have a reasonable chance of a return on our investments - in short, we like to know the risks and the rewards. From the get go there are a few things that you need to put in place before you can trade in covered calls; an account with a brokerage or a retirement account that allows you to write calls, sufficient cash or stocks (greater than 100 shares each) in a number of corporations and, most important, access to a portfolio monitoring and trade selection service. Oh, and the right frame of mind helps too! What we mean by investing with covered calls is an investment strategy that is focused clearly on the investor who wants income rather than short-term gain. You use stocks that you already own and sell an option for a fixed period or event in the future - this is sometimes known as a 'buy-write' trade - because you have bought the stocks and are writing an option to sell the stock at some future date. Let's look at an example; imagine that you own shares in the ABC Corporation, say 100 at $50 and believe that they will increase to, say, $55 in four weeks, then you call your broker and ask them to sell a four week option on them at a strike price of $55. What will happen is that the broker will tell you what each share is trading for as a call option and deposit that in your account - if it's a dollar a share then you would get around $100. So, if over the next four weeks the 'strike price' of $55 is reached then the individual who bought your option will be able to buy your stock at $55 per share meaning that you will receive $5500 for them. That added to the original $100 means that you have made an income of $600 in four weeks. If the stock doesn't reach the strike price then you get to keep your shares and also the $100 - but you can offer them again for a different price. If you are astute enough to be able to judge the way a business or businesses are performing then your only limitation is the amount of income you wish to earn - you already own the stocks. FREE Trading System!