Weekly Covered Calls

November: A few power-thoughts. We are in the midst of a tremendous market. There is so much optimism. Earnings are up for so many companies.For those of us who like to use the market as a part-time business, this presents a caution and an opportunity. First off, we like using assets to make money—real spendable income. We use Writing Covered Calls, because it’s simple, powerful and most people can do it—not to mention that you don’t need a lot of money to get started. If you want information on this strategy, go to wadecook.org and get the report, “Your Money Needs to Get a Job.”

11/8: An Update and Explanation of a process to make more money. In Writing Covered Calls, we usually sell slightly out-of-the-money calls. For example, AMD is $10.80 or so. We buy the stock and use it as an asset to generate income—like rental real estate.

We sell the $11 calls, agreeing to sell this stock for $11 and we get paid cash to do so. The money hits our account in one day. We can now do this on a weekly basis. This is a great money-maker, and you can determine all of these prices before you ever enter the deal.

But what if the stock goes up, and we’re about to get called out, or sell the stock? We decide we want to keep the stock, so we can buy back the sold option. It takes about 18 seconds. We now have no obligation to sell. We’re free and clear—and good to go.

But here’s another scenario. What if the stock moves up. It’s at $11.70. It’s way over the $11 strike price. We know we can buy back the $11 calls for this month or week, but being so far in-the-money, they are a bit expensive. These $11 calls are 90¢ to buy. Again, if we do nothing we will sell the stock.

So, we look at the $11 calls for next week. They are $1.10 x $1.15. It cost us $900 (I’m using 1,000 shares for this example). 1,000 times 90¢ = $900. And on the same phone call or trip to the computer, we sell the same strike price calls for $1.10, Taking in $1,100.

This is okay, but we want to get back to selling a slightly out-of-the-money calls. So, we look at the $12 calls, or even the $11.50s. They are not going for as much money, but if you were to sell this stock, it would be at a higher price.

The reason I’m writing all of this, is that this will be a common occurrence in this market. Stocks are up. But remember, stocks climb a wall of worry. Quite often, the option premium diminishes as stocks get higher. We have lot to think about. But it’s so much fun.

 

UncategorizedWade Cook