Can you explain the advantage of and what exactly is a covered call and how to do it? (May 11, 2002)
A covered call is where you sell a call option on a share of stock you own. What you are doing is selling the right to buy your stock at a specified price (the strike price) to someone else. Sounds pretty crazy at first, especially if you want to hang onto your stock. However, as we constantly write and teach in the online seminars, stocks move up, peak out, move down to consolidate, and then move back up. We like to take advantage of those inevitable peaks by selling calls against our stock positions. When they make a good run and then show signs of peaking on that move, we sell at or slightly in the money call options, let the stock fall, and then buy them back when the stock hits support. As the value of the call option falls as the stock price falls, our gain is the difference between the price we sold the call for and the price we buy it back for. This way our stocks make money for us not only when they appreciate, but when they inevitably pull back. We also use covered calls strictly for generating cash, i.e., where we don't really care if we are called out or not. It is a great defensive strategy, a great offensive strategy, and great for IRA's where we have large chunks of stock.
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