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Resources
What Can Covered Calls do for Me?
by Marc Abrams
In today's stock market, investors have more choices than the purchase of stocks, bonds or mutual funds. Strategies such as the buying and selling of options can increase returns or minimize losses.
There are two main types of options, a call option and a put option. We are going to discuss call options. A call option is defined as a contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
Generally, buying one option contract gives the purchaser the right to buy 100 shares of a stock. If the stock price exceeds the intended price (known as the strike price) the option can be exercised and profit made on the difference between the current price and the strike price.
As long as a market exists for the option, it can be bought or sold any time until it expires. Options become worthless at expiration if they are not sold or exercised prior to that date.
It is possible for an investor to be either a buyer or a seller for a call option. Selling naked calls means that an investor will sell an option without owning stock to offset the option. This is a high risk strategy and therefore most brokers will require substantial equity in your account before they approve you for this strategy. If you sell a naked call, General Electric, for example at a $15 strike price with two months left until expiration you would receive $100. That $100 represents the option premium. If the stock stays below $15 per share you get to keep the $100 premium which you made with no money invested because you sold a naked call. Sounds fantastic, right? However, if stock shoots up to $40 per share, you would be obligated to go to the market and purchase 100 shares of GE for $4,000 and deliver it to the option holder for a loss of $2,400 ($1,500 strike price received less $4,000 cost of shares plus $100 option premium received.) I hope you can see why this strategy carries unlimited risk. I do not recommend this strategy for new option traders.
A safer strategy is to sell covered calls, where the investor owns the underlying stock, and sells the call option. If you had owned the GE stock in the above example you would have simply delivered the 100 shares you already owned to the option holder, and received the strike price of $1,500, and kept the $100 premium.
I know what you are thinking. I just gave up all that increase in stock price by selling GE at $15 per share instead of $40 per share. This is true. You should never sell covered calls on stock that you want to keep. You should look at your investment in the stock and calculate your potential gain/loss if the stock were to get called away before you sell a covered call on those shares.
I successfully use covered calls as part of my investment strategy. Covered calls provide a safe, reliable method for me to generate consistent returns regardless of which direction the stock market moves. The key is learning a little known variation of this popular strategy to increase your success rate in all market conditions.
Published September 28, 2009
Make Your Own Money Machine With Covered Call Stock Options
by Marc Abrams
What is the definition of financial freedom? Financial freedom means making enough investment income to cover all of your expenses. What exactly does that mean? It means you will never have to work for someone else again.
As you search the internet for ways to gain financial freedom, you will find many investment strategies that promise to make you rich quickly. Perhaps you'll find some that teach you little known secrets that will make your financial dreams come true practically overnight. Sounds tempting, right?
I have been working in the financial world for over 15 years. I learned long ago that time is your best friend in your quest to become financially free. In order to get the most out of time, you need to develop a plan of attack and you need to start NOW!
In my opinion, the best way to create your own money machine is to find a safe, reliable investing strategy to use month after month. I'm not talking about a swing for the fences strategy, but one you can use consistently in both good and bad markets over the long term.
Building wealth over time is the goal. With the correct investment strategy, this can be done rather easily. The key is generating positive monthly returns and reinvesting them every month. The power of compound interest will take over if you follow this simple plan.
Albert Einstein called the power of compound interest the eighth wonder of the world. He learned that by reinvesting those earnings month after month, the earnings will eventually grow at an incredible rate. You will then have your very own money machine!
I have discovered a strategy using covered call options that allows me to make up to 10% returns per month. Unlike the typical covered call strategy that you see advertised all over the internet, this strategy also works when the stock market declines. How quickly can you build a money machine when you make those kinds of returns every month? Let's take a look.
If I begin with a one-time $5,000 investment today and consistently earned 5% per month that amount would grow to over $1,600,000 in just 10 years. If I consistently earned 7% per month it would grow to a staggering $16,000,000 in just 10 years. If you had that money in a Roth IRA, it could potentially be tax free.
What if you made monthly contributions to your investment? Using the first example, if you invested $100 per month of new money that amount would grow to $2,500,000 in just 10 years! That is with a total investment of just $17,000 ($5,000 initially plus $100 a month for 10 years). 10 years down the road that $2,500,000 could generate $900,000 per year for you to spend. That is the power of compounding. That is how you create your own money machine.
Again, the key is in finding the proper strategy to use. The covered call system that I use is different because it works in both bull and bear markets. I started building my money machine. You need to start building yours now!
Published August 30, 2009
Discover the Secret to Becoming a Successful Covered Call Option Writer
by Marc Abrams
Wow! The stock market is certainly interesting these days. If you are like me you have certainly given up trying to predict which way the market is going to move. Thankfully, I've found myself in the position to be able to say "Who cares!"
This attitude is not due to the fact that I have essentially surrendered to the stock market and relegated my future to fate. It is simply due to a fundamental change I've made in my investment strategy.
The world is full of people that fail to see the advantages to covered call writing. My favorite piece of advice I get from these so called market experts is that "covered call writing fails because the market takes away your winners and leaves you with the losers". I find this hilarious. If I enter a trade with the potential to earn 8% for the market calls my stock that means I locked in that gain. Who cares if the stock continues to rise in value, I just made 8% for the month!
In order to be successful using covered calls the average investor needs to remain focused on their goal. Forget about what might have been. It is easy to lose sight of why you entered into a trade to begin with and instead focus on the unforeseen benefits that you never received. Month after month of 2% to 10% gains will certainly make me more than the appreciation in value of a couple of stocks that ended up being called away. Keep focused on your goal which is to make money!
Since we have addressed the issue about the market taking the winners, we need to focus on the losers. Please be aware that stocks decline at a faster rate than they go up. People sometimes act on emotions such as fear rather than logic. It is critical that the covered call option writer protect himself in this situation. How does he do this? It can be done rather easily, but the answer is beyond the scope of this article.
What if you can use a strategy to protect yourself when the market goes down thereby locking in those same gains. Think about it, knowing exactly what your gain will be even before you place your trade. I call that taking control of your investments. The exciting fact is that you can do that reliably because I do that very thing month after month.
The key to being a successful covered call option seller is to remain focused on your goal and protect the downside. You must find a proven strategy that will allow you to stick to a plan regardless of which direction the stock market is moving in. Now you need to make a decision. Do you want to be the kind of investor that gambles on hopes of finding the next super stock? Or do you want to be the investor the builds wealth and becomes rich by using systematic, low risk strategies to beat the market month after month?
I've made my decision.
Published August 20, 2009
You Need To Check Your Emotions At The Door Before You Invest In The Stock Market
by Marc Abrams
How many times have you fell victim to other people's stock advice? "This stock is guaranteed to go up!" Usually, the advice or "stock tip" comes from a friend or associate. It may even come from your own investment advisor.
Human nature gets us thinking. You don't want to lose out on the potential gains. Without batting a rational eye, you invest. Most of the time the end result is much worse than you expected. However, you continue on and repeat this cycle over and over again.
Why do we continue to think this way? The answer, for most of us, is that our emotions take control of our decisions. They manage to force us to ignore our logical, rational thoughts. The opportunity for a quick dollar or hope to "get rich quick" heightens our emotional thinking. Please realize that it is the emotional side of our brain that is messing us up, not the rational side.
Many sound investment plans get ignored due to emotions. You can, however, quiet that emotional side that forces you to ignore your well thought out investment strategy if you work at it. More importantly, you'll be able to stick to your plan through both good and bad times.
Some investors, however, cannot shake the investing demons that compel them into making the same mistakes over and over. It is the casual trader that has the most trouble overcoming emotions in investing. They often lack the experience that allows them to treat investing like a business, and not like a game of poker.
The main driving emotion for many investors is the fear of losing money. Making a quick buck is the next one. Don't forget about the king of all emotions, greed. All of these cloud judgment and prevent you from thinking clearly about how an action affects your portfolio. When this type of thinking is in play, disaster can strike rather quickly.
My emotions were extremely difficult to get under control when investing. I was finally able to control my emotions and let my logical side control my investment decisions. In order to do this, I developed a system that I use to invest with consistent success. I have certain parameters that I follow to guide me towards the right kinds of investments. It is a logical system in black and white. Now I remain focused and stick to my strategy even when that emotional beast tries to rear its head.
There is no shame in making poor investment decisions over and over. There is good news, you can change things starting now! I made that change and as a result I have been more successful than I ever have been investing in the stock market. I also managed to do this when the stock market was in a sharp decline! I promise you, to be a successful investor all you need is a solid investment strategy and the ability to keep your emotions checked at the door. Take the advise of someone that did that very thing!
Published August 7, 2009
Discover Why Typical Covered Call Writing Strategies Don't Work In A Declining Stock Market
by Marc Abrams
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.
Selling out-of-the-money covered calls works when the stock market is going up in value. They also work when the stock market is neutral, meaning the market trades sideways with little swing up or down. I don't know about you, but when was the last time the stock market traded sideways 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? The stock simply gets called away if it rises up past the strike price and stays there through expiration. Isn't that what you wanted to begin with? Because you did not participate in those gains you may feel like you left money on the table. If that upsets you then just buy the stock outright and don't sell covered call options on that stock. Why not just let the stock get called away, take your profit and move on? 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.
Published July 26, 2009
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