A Simple Way To Boost Your Profits… Even If You Are Buy and Holder

Are you a buy-and-hold investor?

I want you to pay very close attention to what we are saying.

Most buy-and-hold investors will watch their gains disappear as volatility eats away at them.

There is an incredibly simple strategy you can use to boost your ROI and hold those shares over the long term – keep its appreciation and dividends.

This isn’t just one of my favorite strategies, it is my go to because I get to use leverage to juice the maximum profit from my shares each and every month.

For investors looking for fantastic profits and lower risk, you need understand exactly how to use this strategy and of course, when.

Today we are going to go over the “Covered Call”

One options contract gives the rights to 100 shares of stock, so in order for you to execute this strategy, you must have at least 100 shares of it on your account.

A call option is a contract that gives the buyer of the contract the right to buy stock at a specific price (the strike) on or before a specified date (the expiration).

A covered call means that you own the stock that you’re “writing,” or selling, the option on.

When you write the call option, you must wait until someone in the marketplace exercises the option to buy your stock at the strike price or until expiration.

When (and if) that stock is bought away from you, you are said to be “called out” of the stock.

And you would be “called out” if the stock went high enough above the strike price that someone deems it better to execute the purchase of your stock at that lower strike price, instead of the current market value of the stock.

One of the reasons I love options is that you can use them to accomplish nearly any financial goal.

With this options strategy, you actually own the shares, and you’re selling the right to buy those shares on or before a specific date.

To execute a covered call, one first has to own stock or buy stock – which then may or may not be bought from you. I’ll get into that in just a moment.

Consider this easy example…

Let’s say you sold an ABC Corp. Feb. 16, 2018, $50 call against a block of 100 ABC Corp. shares that you own.

Now, let’s say the market pushes that stock price to $57.

Someone out there may think it is better value for them to exercise their option and buy your stock at $50 instead of $57 per share – even if they paid a $2 premium for the right to do so – and they have until Feb. 16 to do it.

Of course, their $52 cost (that is, $50 for the stock and $2 for the option) is better than the $57 market price of the stock, so they make a profit.

But if you are not called out before the contract expires on Feb. 16, you get to keep the $2 premium you picked up when you sold the option. So, by our example here, you would keep $2 for every 100 shares, giving you a profit of $200.

For you, that’s the best-case scenario because you get to keep that premium… plus your stock.

And you can look out at the next month (or even further) and decide whether you want to put the stock up for sale and get paid to do it – all over again.

This strategy can be expensive, but the expense comes from owning at least 100 shares of a stock.

One of the most important considerations about this strategy is if you’re willing to sell the stock if you get called out. If you can’t bear to part with the stock, don’t write covered calls on it.

But if you already own stock and you don’t mind if it gets bought from you, then this can be a great way to generate some additional income each month.

Now let’s look at a real trade I made in November 2016 – one that paid off nicely for me…

It’s the perfect example of this strategy…

Direxion Daily Gold Miners Bull 3X Inc. (NYSE: NUGT) is an easy-to-trade, liquid leverage ETF that tracks gold miners. Back on November 16, 2016, it was trading at $9.06, so a minimum of 100 shares would cost $906.

There’s that outlay: Remember, the expense in this trade comes from owning 100 shares.

I actually picked up our 4000 shares for $36,240 and then we “wrote,” or sold, 40 covered calls. You’ll come across that terminology often in your options trading; to “write” an option is to sell it – that never changes.

Now, it bears mentioning at this point that you can sell “naked” options on shares that you don’t own. But, like the name suggests, that’s a risky play. It’s definitely safer to go “covered.”

With cash flow in mind, we looked for an options expiration date around a month out from November 16. For our purposes, we decided to go with an expiration of 12/16.

At that time, I sold the NUGT December 16, 2016, $10 calls for $1.29.

So in my trading account, I took the cost of 4000 shares of NUGT, or $36,240, and then took in for the sale of the options contracts, or $5,160. So our cost basis in the stock was reduced to $31,080.

Put another way, I bought 4,000 shares at $36,240 and took in $5,160 for the calls I sold.

What I did next, changed the way I viewed market to this day.

Now I sold those calls because I believed that NUGT had reached a high watermark.

I could have held those contracts until they expired or the stock was called keeping that $5,160 in my pocket…

BUT…

The next day the stock dipped just a little and I bought all 40 contracts for just about $1.00 a contract.

I pocketed $.29 per contract x 40 contracts = $1,120.

For the record, I did it again when NUGT dipped in price.

I wrote another 40 contracts on the 12/16/16 $9 call for $.96.

A few days later when the stock recovered, I bought those contracts back for $.62

That allowed me to pocket $1,360.

That is the trader in me… I could leave well enough alone, but like I preach all of the time – when you see a profit you are happy with… TAKE IT!!!!  

Tom Gentile of MoneyMapPress uses a slightly different and more typical approach to Covered Calls…

Amgen Inc. (Nasdaq: AMGN) is an easy-to-trade, liquid mid-cap biotech. Back on July 6, 2015, it was trading at $154.50, so a minimum of 100 shares would cost $15,450.

There’s that outlay: Remember, the expense in this trade comes from owning 100 shares.

We picked up our 100 shares for $15,450 and then we “wrote,” or sold, a covered call. You’ll come across that terminology often in your options trading; to “write” an option is to sell it – that never changes.

Now, it bears mentioning at this point that you can sell “naked” options on shares that you don’t own. But, like the name suggests, that’s a risky play. It’s definitely safer to go “covered.”

With monthly cash flow in mind, we looked for an options expiration date around a month out from July 6. For our purposes, we decided to go with an expiration of July 31, or July Week 5.

At that time, we sold the AMGN July 31, 2015, $155 calls (AMGN150731C155) for $4.08.

So in our trading accounts, we took the cost of 100 shares of Amgen, or $15,450, and then took in for the sale of the options contract, or $408. So our cost basis in the stock was reduced to $15,042.

Put another way, we bought 100 shares at $15,450 and took in $408 for the calls we sold.

That’s a monthly return of 2.7% for very little effort.

In a month when the S&P 500 couldn’t even give us 2% gains and “high-yield” bank CDs could barely manage 1.5%, those are superior returns.

stock

 

The Risks and Rewards of a Covered Call Trade

Consider the following possibilities that can occur to the covered call trader:

1) The stock price stays flat or moves up a bit, but not enough to risk getting called out.

Pro: This works out so that your sold option expires and you keep the premium as well as the stock and look to repeat the process for another covered call paycheck the next month. With this hypothetical example, 2.7% a month adds up.

Con: The stock could drop significantly on you. You still get to keep the premium of the option sold, but what good is a 2.7% ROI from the covered call strategy when your stock is down 30% to 40% in value? You have to spend a lot of time trying to get that stock up to break even, and that includes writing covered calls each month to do so.

2) The stock rises above the strike sold and you get called out of the stock.

Pro: Depending on what you paid for the stock and the strike price sold, you could obtain a profit on the stock, earning money for that and keeping/making the premium on the call option sold.

Con: The stock you bought for $154.50 and sold a $155 strike call for $4.08 goes up in price starting the next day. You get called out on AMGN. This is an “opportunity risk.”

Now, under this last scenario, you made $408 on the option, plus the gain of $50 in the stock for total profit (less commissions and fees) of $458. But… if the stock goes much higher in the ensuing days, you miss out on all that upside profit – unless you buy back into the shares.
call options

That’s why it’s so important to find a stock that you feel okay with selling – if it comes to that.

You’re looking to do the covered call for income over and above just selling the stock outright, and if you get a month or two more of opportunity to do that with a stock, then so much the better.

— The Option Specialist

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About the Author: The Option Specialist