Continuous Covered Call Writing
The Dynamic Wealth Report
November 30, 2011
by Marcus Haber, Editor
Covered call writing is one of the most popular options strategies out
there. It's also one of the easiest for beginning investors to master
given the proper guidance.
As a matter of fact, when talking to my friends, I commonly hear things
like, "Covered call writing is a piece of cake," and, "I do it all the
time." They think they know it all, especially when I continue to hear,
"What's so tough, I buy stock and sell options."
But when I ask them how often they use this strategy, the answer is
always the same. They say they use it every so often as they have time. None of them apply a systematic approach.
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While many think covered call writing is easy, there's a little
more to it. Like any option strategy, successful covered call writing
requires strict discipline.
When you add discipline to covered call writing, it can be much more
profitable.
And I’m not just making a hypothetical observation. Back when I was
running a $100 million portfolio of stocks and options strategies, I
used this disciplined covered call writing strategy over and over with
great success.
I call it the "Power of Continuous Writing".
Before I explain how it works, let's quickly review the basics of
covered call writing.
First, you buy 100 shares of a stock that you wouldn’t mind owning for
the long run. Then, you sell one call option at a strike price of your
choosing. At expiration, one of two possibilities occurs…
One, the stock closes above the strike price and gets assigned. In other
words, you’re forced to sell your stock at the call option’s strike
price. The premium received and stock appreciation up to the strike
price is your profit.
Two, the stock closes below the strike price and your option expires
worthless. When this happens, the premium from the option you sold is
your profit.
So, getting back to the strategy…
The way this strategy works best is to continuously do it over and
over. In the long run, you’ll be amazed how much more money you’ll put
in your pocket.
You see, true professionals are quick to re-write their covered calls.
By doing this, the pros are able to keep their money working for them. This allows them to continuously collect premiums on cash that otherwise
would be sitting in a money market fund earning next to nothing in
interest.
Here’s an example of how profitable the Power of Continuous Writing
strategy can be…
Let’s say you bought 100 shares of DuPont (DD) on May 22, 2007 at a
price of $52.63 ($5,263). Now, assume you sold the $55 strike call
option on your DuPont shares continuously every six months.
In other words, as each option expired worthless, you immediately sold a
new one. If your stock got assigned at expiration, you immediately
bought it again and sold another call option.
Most importantly… you continued this process for four straight years.
Believe it or not, it makes a world of difference.
If you merely bought the stock and sold it four years later, you’d have
made just $6.66 per share. Obviously not the best return over a four
year span.
On the other hand, if you wrote a new call every time your position
closed, your results would have been much better. After the same four
years, you'd have made a healthy profit of $30.66 per share. Between
capital appreciation, accumulated dividends, and premiums received,
you're looking at a 58% total return.
That’s nearly five times the return you would have made just buying and
holding.
If that's not convincing, I don’t know what is! Well… in addition,
DuPont essentially traded flat over the four year period.
Bottom line…
I've never been able to understand why everyone doesn't take advantage
of this type of strategy. It doesn't cost anything. And it's clear you
have nothing to lose.
All you need is a little time to make the Power of Continuous Call
Writing part of your portfolio. Reduced down to its simplest terms, it
allows you to compound option premiums without investing any additional
capital.
So, don't go on wondering why you haven’t been using this strategy… get
out there and do it. You’ll feel great when your covered calls are
generating solid returns time and time again.
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