There are several reasons. For one, the general populace is largely unaware that such a thing exists. Only covered-call services such as at Markettamer.com promote them or teach them in depth, though most investing-education services at least mention them.
The popularity of covered calls is growing by leaps and bounds, as it should. It takes investing to the next logical level: income investing.
Second, brokers, money managers, financial planners and other players in the financial services arena either aren’t conversant with covered calls or simply see no advantage in mentioning them; or both. Such advisers almost universally are paid sizable commissions by funds and other products they recommend. To put it bluntly, they make money when you buy the products they peddle. Assisting you in any meaningful way with self-directed covered call writing just is not on their agenda.
Third, the information disseminated about covered calls by writers and websites who really don’t understand them tend to paint the strategy as a highly dangerous one that offers precious little return for the risk presented. Yet these same “experts” will then blithely urge you to buy and hold stocks for years even through horrible bear markets in hopes of one day making a bundle as their prices increase over time – without writing calls to generate income from them – as if revenue from call writing somehow increases the risk! (It doesn’t)
So the counter-argument is nonsensical on its face. How can producing cash flow from an asset increase the inherent risk of owning the asset? If you know a real estate developer, ask him if he’s willing to try simply holding onto properties without generating positive cash flow; you know the answer already. He wants a return on his money: cash flow. This Wall Street disinformation campaign makes sense historically, though. Brokerage firms used to make a lot of their money through horrendously large commissions on client trades. Of course they recommended buying stocks. If you’re in the nail business, you recommend hammers.
Brokers in particular fear liability when customers lose money, even on self-directed options-related trades, and they make little off option transactions. Educating customers (an expensive proposition) about options trading usually results in defection of those customers to discount online brokerages once the customers get “smart.”
You can’t blame the financial services industry for doing what is in their economic best interests any more than you can blame the lion that eats you. But please, recognize that your interests and the interests of the industry (like yours and the lion’s) are very different. They make money when you make money; and they make money even when you don’t. Your choices are to rely on their advice (that is, buy what they peddle) or handle your own investing. What should you do?
Larry McMillan, perhaps the greatest options expert, put it better than anyone: “You will have to predict something in order to profit, for only market makers and arbitrageurs can construct totally risk-free trades that exceed the risk-free rate of return, after commissions.” If you believe that stock-picking or trade-picking doesn’t work, then you cannot trade. But if you will trade, then you must make choices – and thus you must predict.
This series of articles unapologetically makes a case, hopefully a persuasive one, for the ease, predictability and power of covered call writing as a consistent income generator acceptable to conservative investors.
Every public company, every business, in fact, is valued and measured by its cash flow. You know, our Grandfathers understood that. Yet the old B&H strategy doesn’t provide cash flow. In that sense, it’s practically un-American. But covered call writing provides great cash flow.
There are many different styles of covered call writing. Some people never do more than write calls on portfolio stocks, though there is a bit of art even to portfolio writing; and it is covered in this book, naturally. Many of us buy stocks for the express purpose of writing calls on them and then sell the stocks. There are covered writing strategies for the active trader who seeks action, for the shoot-the-moon directional trader, for the lazy writer, for those with a long-term time horizon, for those fearful of risk and seeking extremely low-risk or limited-risk trades, and for the conservative crowd.
To paraphrase the old burger commercial, you can have covered call writing your way. Whatever your lifestyle, if you don’t live on the moon, if you have access to a computer, there is a covered call strategy that will work for you. Is it riskless? No – but there are ways to limit risk in the trade; to in effect insure the trade.
I knew when I titled this section “Sacred Cows, and a Barbecue” that readers would assume my intention was to skewer and barbecue those cows. I think I’ve skewered them – as though the industry would notice or care – but the “Barbecue” part of the title does not relate to me barbecuing the sacred cows.
No, dear reader, it refers to the financial industry’s “barbecuing” of millions of Americans 365 days a year. You’ve seen it happen. Perhaps you’ve even been an invited guest at this barbecue.
Please don’t be one of them. There is another investing strategy, built on bringing in great cash flow that significantly beats the markets, even good markets, and it can be done while limiting risk in the trade to just a few percent. These articles are designed to teach you how.
Whatever you choose, it is important to me that you learn there is a better way – covered call writing.
Covered call writing, thank heavens, is not rocket science. And I promise you one thing: if making money with your investments is important to you, you can do this.
>> More: Covered Call Basics