Most experts in the stock market will generally say, “the writer of an options is foregoing any increase in stock price that exceed the strike price for the premium received when selling calls. The option writer continues to bear the risk of a sharp decline in the price of the stock. The cash premium will only offset this loss.” Do you buy into this way of thinking? This is not correct based on how I trade covered calls.
With my method, you no longer care about the price of the stock that you purchased. When the stock does go down, we would buy back the option at an inexpensive cost and immediately write a new option. For example, we received a premium of $3.00 and close it at $0.25 when the stock price drops. If the stock price went down $5.00, we would write a new call at at a $5 lower strike price. This may net an addition premium of $3.00 so when you add the premiums minus the buy back of the first option we have $5.75 while the stock only dropped $5.00. The second premium helped to offset the loss from the strike price.
When the stock does not reach the strike price, let the option expire, keep the premium, and write a new cal at the same strike price. When the stock price goes above the call strike price, buy back the call option and write a new option at a higher strike price to reflect the gain in the stock. the second premium will help defray the cost of the buyback while you have a gain in the stock price.
For the buyer, options are a wasting asset as time decay erodes value. The time value portion of a option is always zero at expiration. Selling the time value repeatedly on the same stock makes option income work for you.
With my trading method, you will not be waiting on the stock price to go up to make money. You will make money on the wasting time value of options you have sold. this will change your investing philosophy about the stock market.
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