Covered Call Boot Camp
We’ve discussed the safety aspects of writing covered calls, but what good is safety
without profits? Obviously, not much. However, it should be easy to see that when you’re
immediately reducing the cost-basis of your stock below the market the very day you buy it,
you’re greatly increasing your chance of making a profitable investment.
In up markets, you’ll often get not just your premium, but you’ll
get some capital appreciation as well.
In the out-of-the-money example we gave earlier, if the stock rises above the $19 strike
price, your profit won’t just be just the 7.8% shown in the table. That profit assumes no
movement in the stock’s price. If the stock rises sufficiently to be called, your profit is
13.8% for the six-month period, which is nearly 28% annualized. That’s because it is called
at the strike price, not your original buy price.
In an up market if our stock gets called, we will often buy the same stock again,
(or one that looks even better at that time), and aim for that full 28% annualized return.
If it looks like the market is topping out, we may write a shorter expiration of only 3 months,
or write an in-the-money call, and be satisfied to make only 20% or so for the year on that
part of our portfolio.
So, if the market is going up, you participate in the largess. But if it goes down, you have a high degree of protection.
Next: What's The Catch?
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