Why You Should Trade Covered Calls

We have seen two market crashes – one beginning in 2000 and another in 2007 – in a span of less than 10 years. One sore investor’s – Max – comment to me says it all: “I’ve been ruined twice in less than a decade.” Well, actually not; he didn’t sell at the market bottoms and thus never took a deductible loss. His problem is that he didn’t realize a return because he didn’t liquify the gain in value through the late 1990s or in 2007. He wants to know: where’s the beef? Had he sold at or close to market tops and bought the bottoms, he would have made a killing.

In my opinion, the smartest buy-and hold strategy is to buy stocks close to the bottom of a bear market; a greater than 50% loss off the market high is a reasonable place to start looking for bargains. The first half of 2009 presented just such an opportunity. Buy great companies that pay a good dividend (a bargain-basement stock price greatly increases dividend yield) and are likely to participate zestfully in the expected market rebound. Yields of 5% or more are available as I write this, on marvelous companies that grow earnings consistently.

Inevitably, a market top will be reached. Why on earth would one passively hold those stocks through another bear market cycle as values plummet? One reason might be dividends, but not many investors are getting 5% or more annually. Another approach, explained further on, is writing calls on your portfolio stocks. In fact, a declining market also offers an opportunity to write calls on long-term holdings. The stocks are declining anyway, so why not pull a nice income out of them? Stocks should never be allowed to laze around your portfolio.

Please understand: I am not debunking or deriding long-term investing. But – done properly – it isn’t simple, it isn’t easy and it doesn’t always work so well, due to the luck element. And you must be ruthless about discarding lackluster performers, perhaps re-balancing in tune with market or economic trends. If this sounds a bit speculative, it is.

Studies have shown that as much as 40% of Americans’ retirements will come from investing. Invest wisely, my friend!

Instead of “wishing and hoping” that the stocks in which you tie up precious cash, unproductively, will ride to your retirement rescue and produce wealth… more investors should instead try Income Investing – a conservative strategy that can produce an average monthly return of 3% to 5%, which builds wealth pretty quickly.

These articles are unabashedly about covered call writing as a means to generate an income every single month from stock ownership. Done right – a major thrust of this book – it works pretty well in most markets. It can also be done in a manner to limit risk to just a few percent of the amount invested.

Imagine that: you can force a stock to generate an excellent income – pay you a handsome rent – while defining and limiting your maximum risk at the outset. And you can choose how much risk to undertake!

If you already know about covered calls and can deploy the strategy with consistent success, then my methods are just what you have been seeking; they will only take your writing to a higher level. If you have not found covered call success, or haven’t tried them yet, or are not quite sure what they are, you’re in for a treat.

But first, a question urgently needs to be answered. Why aren’t people shouting the good news about covered calls from the rooftops?

Most Popular Posts: