Writing Covered Calls: The Basics
Pathway to Profits: Lesson #1 Very few people really understand wealth creation. For example, some people have equity—say in a rental house, or artwork or even the stock market—but, their wealth means little in the way of living a more abundant life.
From my earliest days as a real estate investor and then a stock market investor (and oil, cars, gold and silver among others) I realized the paramount importance of generating income. I used to look at my audiences and hold out both hands, balancing them back and forth: “Assets or Income? Which do you want more of?” I asked them, “what do you need to quit your job? What will let you retire more abundantly?” Then I continued the questioning: “Can you have income without assets? No, I went on, but can you have assets without income? Far too many of you have all kinds of things that mean nothing in the way of letting you retire, go fishing, or live a better life. They nodded.
Think about your own life. What will help you retire at 42, 52 or 82? It is income. You don’t need more assets, per se. You don’t need another job. You need income replacement. Doesn’t that sound wonderful? And here’s the rub; For many of you, you are your only income producing asset—AND IF YOUR ASSET DOESN’T GO TO WORK, WHEN WILL YOUR INCOME STOP?
And here’s the next problem: We are constantly being sold investments that produce no income. In some cases, we have to work an extra job to support our assets. That is sad.
Added to this problem is this: Many investments produce no income. Let’s explore this. There has to be money coming in from a third party, an outside source. Think of buying a rental property. You want cash-flow, tax write-offs and growth. Good, you now own the promise of real estate. But what if you do not have a tenant? The house sits vacant. What happens to your plans for the future?
Now think of JC Penny. Say you own stock in this company. People go in and buy things. Ask yourself this: What makes your stock valuable, and what would make it go up in price? Say, people don’t go in and buy things. What would happen to your investment? You surmise right if you say it will go down.
Okay, let’s do this again the Wade Cook way. You own the stock. You think it will grow in value. Maybe if the company does well, you stock will rise. Are you really in control of any of this. Yes, you can do your Christmas shopping there, but real impact will that have?
That third party, Penney’s customers are not the “Outside Source” we’re talking about. We need to force the issue. We’re coming up on one of my favorite cash-flow strategies. For this brief first lesson, you don’t need to understand everything about stocks and options. Suffice it to say, you can make money—getting money from a separate third party.
This process is called, “Writing Covered Calls.” Here is briefly how it works. It’s a one-two punch. We buy the stock; it was recently going for $9. Now we sell an option and take in money for doing so. Time out. Most people buy options. Most people lose. Not us, we’re selling the call option—giving someone the right to buy our stock at $9.
Let’s look at this trade from the option buyers point of view. They risk the option money by buying. The stock has to move a certain way and move quickly or they will lose. We are on the better side of this trade. Say the $9 call is going for 65¢. If we owned 100 shares, at $900 (or half of that on margin) we will now take in $65 for agreeing to sell this stock to the market. It’s a four-week trade. $900 or $450 to make $65 is not bad. $9,000, or $4,500 would make $650 for one month. What would this money make in the bank? You can do this type of trade every month. Next month you make $620, the next month $690.
In lesson 2 you’ll see a few real deals being done—all taken for our TDTs—Thousand Dollar Thursday. In lesson 3 you’ll learn about the elements of Writing Covered Calls. Then there will be more.
It’s time to start think about your retirement. If you want to get going faster, check out the IQ Income Quest Program for Cash-Flowing the Stock Market.
Visit wadecook.org and get a FREE special report: WADE COOK'S CASH FLOW FIRST.