Writing Covered Calls
One great investment strategy is called covered call writing. That strategy can be very powerful if it used correctly.
So, what is covered call writing? When an investor sells a call on their stock what they are doing is selling another investor the right to buy the stock from them at a given price at some point in the future. For example if you own stock XYZ and it is trading at $53 you may decide to sell the front month $55 call for $4.
You would get $4 in option premium once you enter the trade but you would also be obligated to sell your stock at $55 if you get called out. Well obviously no one is going to make you sell a $53 stock at $55, so it is pretty likely that the trade is going to be profitable.
But if the stock goes above $55 it is a little different. If a stock breaks $55 then chances are you will get called out of your investment and forced to sell your stock.
There is some risk to placing a covered call trade. Say the stock goes up to $70 you would still have to sell it at $55, that means you missed a good chunk of the move. Huge moves like that can actually happen in the market, so the risk of missing a profit is real.
But then again selling covered calls can be the perfect way to increase your returns in the long haul. If the stock stays flat, goes down, or even comes up a little the call will expire worthless and you would walk away with the profits.
Selling calls can be a pretty consistent way of growing your money, and some times consistency works the best in the long term. While it can be risky it can also be a great strategy, this is especially true when you combine it with fundamentally strong dividend paying stocks.
