Home | Finance | Stock Market Investing
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. Here are a few tips that may help you write covered calls successfully. Always check the fundamentals of the underlying stock and make sure that you would be happy to own even if options didn't exist. A great resource for viewing fundamental 'ratings' for stocks is at http://www.morningstar.com Don't enter a Covered Call trade just because the option premium looks attractive. Higher option premiums (10-15% or more) often mean that the stock is more volatile i.e. prone to huge price swings and therefore greater risk. I personally target the larger, more liquid and stable companies with monthly call option premiums between the 3-6% range. One of my personal favorites and a stock that I have had considerable success writing covered calls on over the years is Oracle (ORCL). I've also had consistent success with Intel (INTC) and Nokia (NOK). At times the Nasdaq Tracking Unit (QQQQ) is also attractive (a 3% yield is the highest I've ever seen it though). Don't hold stocks at least 2 days either side of earnings announcements. Much of the time expectations of good and even great earnings are already priced into the stock and should the stock fall short of expectations or even worse disappoint, a virtual bloodbath can follow. I've experienced declines of 30-50% in just a few days by holding my covered call stocks over earnings announcements. Don't get me wrong, it can also be good time to be a stockholder if the earnings numbers are really great, but I'm a little more conservative and to me it's just not worth the risk. You can always buy back in afterwards anyway! Always take a look at stock charts when choosing a stock to write covered calls on. There are 3 general patterns that I look for: 1) A moderate uptrend. 2) A sideways trend. However the most conservative/safe chart pattern for covered call writing (in my experience) appears after a stock has had a steep sell off and has begun to move sideways for a couple of months. This is a type of 'bottoming' pattern where much of the downside risk has already been 'sold' out of the stock. As covered call writers it's always important to remember that our risk lies if the stock falls sharply, so we want to do our best to reduce the risk as best we can. This is just one way that I have found to be effective. If you go to http://www.stockcharts.com and pull up the chart for the QQQQ during the early part of 2003, you'll see this exact pattern. I successfully wrote covered calls on the QQQQ for about 4 months during this time before I allowed myself to be assigned and moved onto another opportunity. There you have it. Hopefully these tips help you on your way to consistent profits and monthly cashflow writing covered calls. Oh, it also goes without saying but I'll say it anyway, "Don't put all your eggs in one basket!" Happy option trading and investing!
Information and Articles: http://www.mastersmba.com
Providing Information on various topics, please browse our other Articles for more informative resources, we house information on every topic imaginable so regardless of your needs you can be assured to find the answer here. If you wish to reprint this on your own website, simply click the "Web Version" in the right menu, and you are presented with a pre-formatted document to use.
A lot of the information is written by the Master Article team, and published exclusively on the MastersMBA.com website, and we do our best to research all information to ensure it's as accurate as possible. However at times we also publish documents given to us by other sources, we do examine these documents to ensure they are as accurate and correct as possible however at times they discuss highly specialized fields making it hard to authenticate the validity of every fact in the document. These are written by specialists in their respective fields, and we do trust their integrity and judgment however it's always a good idea when doing any research to consult a number of sources and form your own conclusion based on a number of view points.
