El Filosofo Liberal

Anyone just starting out in covered calls needs to decide if they want to focus on an in-the-money (ITM) or an out-of-the-money (OTM) strategy. This is a significant decision that will have important effects on your long term success and that amount of success. Benefits of ITM (1) More Protection: ITM strategies obviously offer more downside protection than OTM. You will make the same amount if the stock goes up, stays flat, or goes down to a certain percentage that it is ITM. (%ITM is the % the stock must drop to reach the strike price {$purchased - $strike}/$purchase) This is a HUGE advantage because ITM systems are more forgiving of price fluctuations and mistakes on the trader's part. (2) Since an ITM trader is more likely to be called out at the end of the month, every month you will research and find the highest yielding CC positions that meet your requirements. Compared to an OTM strategy, you are more often left with the stock at the end of the month since it did not rise t...

Anybody can invest and get the market rate of return, even my 84 year old grandmother who probably does not even know what stocks are. All you have to do is invest in something like a total stock market index fund. In fact doing this, you will beat around 70% of all the active fund managers. However, if you want to do better than the market, you better have a plan. Covered Calls is a way to do so. Covered calls are the most conservative of all the various option strategies. It seems pretty simple but, many people have trouble making money with them. Most of their problems are one of four things: (1) failure to properly screen good CC candidates (2) failure to monitor and manage your positions once in them (3) not being in enough positions to be diverse and (4) not trading with enough money and thus commissions and taxes take most or all of your profits. (1) Failure to properly screen positions I use OptionsXpress and they are great, but at the time of this writing, their covered call s...

Writing Covered Calls is a conservative strategy where you buy a stock that you would like to invest in and then write a call option against that stock. This is a cash generating strategy that not only offers downside protection that you otherwise wouldn't enjoy if you just bought the stock, but also gives you the ability to generate a consistent monthly income, for only minutes of your time. However as with all option trading strategies, there are pitfalls that you will need to avoid if you are to be consistently profitable. What if the stock price falls dramatically? Your calls really do nothing to protect you against losses as the market falls. Sure, you get to keep the premium from selling the call (when it expires worthless), but you still own the stock, which is now worth considerably less than what you paid for it. The problem then becomes that you will not be able to sell another call at the original strike price. Instead, the next time you will have to sell the call at a l...