Discover Why Typical Covered Call Writing Strategies Don't Work In A Declining Stock Market
Many websites and e-books on investment training strategies promise you incredible things. Writing Covered call options on stock is one of the most popular trading strategies taught today. These websites promise that you can earn up to 10% monthly returns using that very strategy. Sound good? Read on.
Under the right circumstances, impressive monthly returns can be achieved by selling out-of-the-money covered call options. This strategy has been successfully used by me. However, it is not without its disadvantages. The public has not been properly educated by the website and e-book marketers. This strategy is marketed as having low risk and being conservative. They leave you holding the bag when it all goes wrong.
Selling out-of-the-money covered calls works when the stock market is going up in value. They also work when the stock market is neutral, meaning the market trades sideways with little swing up or down. I don't know about you, but when was the last time the stock market traded sideways for any length of time?
We are currently in the midst of an extremely volatile market. The Dow frequently moves as much as 200 points either way in a single day. Hardly a profitable market for an out-of-the-money covered call writer. Your profits will start to evaporate once the stock you are holding starts to decline. I can assure you that profits can evaporate very quickly. I have seen the value of a stock drop from $10 to $1 over night! There is never enough premium on an option sale to cover that kind of decline.
The key to out-of-the-money covered call writing is to select stocks that will get called. Too many advocates of this strategy do not want the stock to get called. They want you to keep the stock so you can sell a covered call option on it the next month. This is a flawed strategy. You need to select stocks that are trending up in value, hence, a rising market. Those are the stocks that will maximize your profit. If the stock gets called, I know I ended up making my maximum anticipated return.
What if the stock shoots way up in value? If the stock shoots up through the strike price and remains there at expiration, it simply gets called away. Isn't that what you wanted to begin with? You may think you left money on the table by not being able to participate in those gains. If that upsets you then just buy the stock outright and don't sell covered call options on that stock. Instead, let the stock get called away and take your profit for the month. Then look for another stock to buy and sell calls on for the next month.
Remember, selling out-of-the-money covered calls can provide an excellent source if income in a rising stock market. However, the stock market we find ourselves in today is less than ideal for this strategy. There are, however, other strategies that will offer significant protection in a volatile or declining stock market. - 23208
Under the right circumstances, impressive monthly returns can be achieved by selling out-of-the-money covered call options. This strategy has been successfully used by me. However, it is not without its disadvantages. The public has not been properly educated by the website and e-book marketers. This strategy is marketed as having low risk and being conservative. They leave you holding the bag when it all goes wrong.
Selling out-of-the-money covered calls works when the stock market is going up in value. They also work when the stock market is neutral, meaning the market trades sideways with little swing up or down. I don't know about you, but when was the last time the stock market traded sideways for any length of time?
We are currently in the midst of an extremely volatile market. The Dow frequently moves as much as 200 points either way in a single day. Hardly a profitable market for an out-of-the-money covered call writer. Your profits will start to evaporate once the stock you are holding starts to decline. I can assure you that profits can evaporate very quickly. I have seen the value of a stock drop from $10 to $1 over night! There is never enough premium on an option sale to cover that kind of decline.
The key to out-of-the-money covered call writing is to select stocks that will get called. Too many advocates of this strategy do not want the stock to get called. They want you to keep the stock so you can sell a covered call option on it the next month. This is a flawed strategy. You need to select stocks that are trending up in value, hence, a rising market. Those are the stocks that will maximize your profit. If the stock gets called, I know I ended up making my maximum anticipated return.
What if the stock shoots way up in value? If the stock shoots up through the strike price and remains there at expiration, it simply gets called away. Isn't that what you wanted to begin with? You may think you left money on the table by not being able to participate in those gains. If that upsets you then just buy the stock outright and don't sell covered call options on that stock. Instead, let the stock get called away and take your profit for the month. Then look for another stock to buy and sell calls on for the next month.
Remember, selling out-of-the-money covered calls can provide an excellent source if income in a rising stock market. However, the stock market we find ourselves in today is less than ideal for this strategy. There are, however, other strategies that will offer significant protection in a volatile or declining stock market. - 23208
About the Author:
Marc Abrams Is A Certified Public Accountant With Over 15 Years of Financial And Investing Experience. Visit Marc's Website at http://www.rebuildingmyfuture.com To Learn More About Successful Covered Call Option Writing Strategies In A Declining Market.
posted by X - Men @ 2:40 AM
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