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Posts Tagged ‘covered call selection’

How To Avoid the Option Premium Trap

Many investors get too excited while seeing the high potential return based on high premiums.  There is always a reason that a call premium is higher than normal.  It may be a fad stock, potential takeover target or expecting some news release that may affect stock price.  The time premium on these stocks is big making them tempting to write.  It is best to pass up these volatile stocks for more stable and fundamental stocks.  In call writing, your gains are topped but loses are not limited to just the net proceeds of the trade.

There is no option premium large enough to protect you from a big downside break.  When you hear stories of investors being wiped out in writing calls, it is usually because they were writing for fat premiums.  The basic rule is to stick to stable stocks that you would feel comfortable at the net price paid for the optionable stock.

The exchanges are filled with potential stocks to write calls on.  The best way to find candidates is through a process of elimination.  For example, start with a list of stocks ranked 5 stars by S&P.  Then eliminate those with a high volatility such as 50% or higher.  Then determine which stocks you want to own to sell calls on the stock.  Then you can diversify the stocks you select from different sectors and industries for more safety.

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August 2012 Monthly Income Plan Update

As we approach the end of the August option expiration cycle, the Get Rich Monthly Income Plan had a great month for investors.

In January, we kicked off the perpetual covered call strategy. For those who are new to this concept, let me share the rationale of this income investment. This strategy was created to produce monthly income with stock dividends and covered call premium.  In addition, there is a protective, blanket put, to ensure the volatility in the market does not affect your return of capital.  We will follow the progress of the perpetual covered calls each month throughout 2012 and I will email premium members with trading directions when an action is required.  Here are some of the results for 2012:

Perpetual Covered Call Returns:

Stock 1 – Oil Company has a YTD total return of 96.1% including dividends and special dividends.

Stock 2 – Drug Store Company with a YTD total return of 36.4% including dividends.

Stock 3 – Technology Company with a YTD total return of 25% including dividends.

We also provide a list of stocks for monthly covered calls.  Here we change the list each month based on investing in the right stock for monthly income.  For the August option cycle, this was a great month for our Monthly covered call trades.  We made monthly returns of 7.55% on UA, 4.33% on LVS, 4.0% on HP, 3.73% on VIAB and 3.58% on CERN.

We have added the covered put trades as an additional way to sell premium and to enter stock positions.  I frequently sell puts to enter a new stock position because (1) I get the stock at a lower price than it is trading at the market. (2) I get to produce income from the premium I receive when selling the puts.  If the stock is above the put strike price at expiration, I keep the premium and have the opportunity to sell more outs or just purchase the stock cheaper because I have the put premium to cover partial costs.  I have used this technique for several months on the same stock before I get the stock put to me.  This creates enough income to really lower the total cost of the stock.  Then, when the stock is put to me, I sell calls (covered) to earn more income until the stock is called away.  Then – rinse and repeat.

For August options, the covered put trades were great this month as all recommendations were winners.  Returns ranged from 2.2% to 3.93% in one month.

For investors wanting to create monthly income, the Get Rich Monthly Income Plan is right for you.  Click here to learn more.

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