Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘covered call writer’

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.

How to Get More Protection from Stock Price Declines

In a flat to bullish market, most call writers will sell an at-the-money call on the stock they own.  the rationale for selling an ATM call is that they have the highest premium in terms of time value.  Of course, the option seller can sell at any strike price.  What should the call seller do in a market driven by fear such as potential debt defaults, FED changes, financial chaos, etc.?  The smart call writer will change their strike price to get more downside protection.

Suppose you want to write a call on a stock that you are concerned about a potential price drop,  you can look to write an in-the-money call.  The stock is trading at $7.80 per share.  You can write the $7.50 call for $0.90.  This call has a $0.30 intrinsic value so you are getting $0.60 in time value. As long as the stock is above $7.50 at expiration you keep the $0.60 in time value and the $0.30 intrinsic value.  Now you have created a situation where you still make money if the stock declines by 3.85%.

Let’s try another example.  The stock is trading at $136.00 per share.  You can sell the 135 call for $10.25; the 130 for $13.15; the 125 for $16.40; the 120 for 20.05.  You can go down to the 120 call strike to produce a 13% downside protection.   Yet you still get a $4.05 time value premium that is almost a 3% return.  Now you have created a situation where you still make money if the stock declines 13%.

Considering an average volatility, this is a great way to protect yourself for an anticipated price downturn.   While selling ITM calls does not usually realize a return as high as selling ATM calls, it does have the benefit of creating more downside protection for the stock price to fall and still return a profit.  You should only sell ITM calls if you are willing to let the stock be called away.

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