Discover Why Typical Covered Call Writing Strategies Don't Work In A Declining Stock Market
Incredible things have been promised by many websites and e-books regarding investment training strategies. One of the more common stock market trading strategies taught is to sell covered call options on stocks. These websites promise that you can earn up to 10% monthly returns using that very strategy. Sound good? Read on.
Incredible things have been promised by many websites and e-books regarding investment training strategies. One of the more common stock market trading strategies taught is to sell covered call options on stocks. These websites promise that you can earn up to 10% monthly returns using that very strategy. Sound good? Read on.
I will be the first to admit that selling out-of-the-money covered calls can bring lucrative monthly returns under the right circumstances. This strategy has been successfully used by me. However, this strategy is not without its disadvantages. The public has not been properly educated by the website and e-book marketers. They market this strategy as conservative with little risk. They leave you holding the bag when it all goes wrong.
When the stock market is rising in value selling out of the money covered calls works well. Additionally, when the stock market is neutral (not going up or down by any meaningful amount), this strategy also works well. Please tell me when the last time was that the stock market remained neutral for any length of time?
We are currently in the midst of an extremely volatile market. We have recently seen swings in the Dow as much as 200 points in either direction on any given day. Hardly a profitable market for an out-of-the-money covered call writer. Once that stock you are holding starts to decline, so do your profits. I can assure you that profits can evaporate very quickly. I have seen stocks fall from $10 per share to $1 per share over night! There is never enough premium on an option sale to cover that kind of decline.
The key to out-of-the-money covered call writing is to select stocks that will get called. Many so called experts do not want the stock to get called. They want you to keep the stock so you can sell a covered call option on it the next month. This strategy is flawed. You need to select stocks that are trending up in value, hence, a rising market. Those stocks will make you the most money. If the stock gets called, I know I ended up making my maximum anticipated return.
What if the stock shoots way up in value? If the stock shoots up through the strike price and remains there at expiration, it simply gets called away. Isn't that what you wanted to begin with? You may think you left money on the table by not being able to participate in those gains. If that upsets you then just buy the stock outright and don't sell covered call options on that stock. Instead, let the stock get called away and take your profit for the month. Then look for another stock to buy and sell calls on for the next month.
Remember, selling out-of-the-money covered calls can provide an excellent source if income in a rising stock market. However, the stock market we find ourselves in today is less than ideal for this strategy. There are, however, other strategies that will offer significant protection in a volatile or declining stock market.
Incredible things have been promised by many websites and e-books regarding investment training strategies. One of the more common stock market trading strategies taught is to sell covered call options on stocks. These websites promise that you can earn up to 10% monthly returns using that very strategy. Sound good? Read on.
I will be the first to admit that selling out-of-the-money covered calls can bring lucrative monthly returns under the right circumstances. This strategy has been successfully used by me. However, this strategy is not without its disadvantages. The public has not been properly educated by the website and e-book marketers. They market this strategy as conservative with little risk. They leave you holding the bag when it all goes wrong.
When the stock market is rising in value selling out of the money covered calls works well. Additionally, when the stock market is neutral (not going up or down by any meaningful amount), this strategy also works well. Please tell me when the last time was that the stock market remained neutral for any length of time?
We are currently in the midst of an extremely volatile market. We have recently seen swings in the Dow as much as 200 points in either direction on any given day. Hardly a profitable market for an out-of-the-money covered call writer. Once that stock you are holding starts to decline, so do your profits. I can assure you that profits can evaporate very quickly. I have seen stocks fall from $10 per share to $1 per share over night! There is never enough premium on an option sale to cover that kind of decline.
The key to out-of-the-money covered call writing is to select stocks that will get called. Many so called experts do not want the stock to get called. They want you to keep the stock so you can sell a covered call option on it the next month. This strategy is flawed. You need to select stocks that are trending up in value, hence, a rising market. Those stocks will make you the most money. If the stock gets called, I know I ended up making my maximum anticipated return.
What if the stock shoots way up in value? If the stock shoots up through the strike price and remains there at expiration, it simply gets called away. Isn't that what you wanted to begin with? You may think you left money on the table by not being able to participate in those gains. If that upsets you then just buy the stock outright and don't sell covered call options on that stock. Instead, let the stock get called away and take your profit for the month. Then look for another stock to buy and sell calls on for the next month.
Remember, selling out-of-the-money covered calls can provide an excellent source if income in a rising stock market. However, the stock market we find ourselves in today is less than ideal for this strategy. There are, however, other strategies that will offer significant protection in a volatile or declining stock market.
Author:
Marc Abrams Is A Certified Public Accountant With Over 15 Years of Financial And Investing Experience. Visit Marc's Website at http://www.rebuildingmyfuture.com To Learn More About Writing Covered Calls In Today's Stock Market