Covered Call Writing

So much has been written about covered call writing, yet many investors have no idea how much money can be made monthly, and now weekly, by writing covered calls.

Most believe that options are risky and stay away. Your broker wants you to think that so they can sell you Their products. The fact is that covered calls are approved for 401K and IRA accounts. All big banks and institutions are option sellers so they can super size their returns.

The biggest complaint I hear is that you lose out when a stock runs up because the call you sold has to either be bought back at a higher price or you have to deliver the stock at the strike price.

My response -- so what!

No one has a crystal ball to tell what is going to happen. In every case that has happened to me, the gain in the stock was more than the higher price I had to pay to buy back the call, so always net ahead. Would I have made more money not writing the call, well yes, BUT there's no way of forecasting.

A Trading Plan is a Must!

To be successful, you need to have a trading plan; what to do if the stock goes up, down or stays flat. If you sold a call and the stock is flat, then good for you as you just bank the premium.

If the stocks tanks, then you can buy back the calls for cheap, bank the premium and wait for a rebound off of a major support point, then sell them again. My rule is if the sold call decreases by 50% or more, I take the money.

If the stocks runs up hard, like BIDU, then one plan would be to set your risk threshold of when you buy back. This can be a bit tricky, is it a major new leg up or short covering (meaning the stock will pull back)? Be familar with the "personality" of your stocks so you can make an educated guess. In most cases I will buy back the calls if the stock is breaking out and moving in a confirmed uptrend. I don't have a set percentage.

Weekly Options are a License to Print Money!

Weekly options are now available on stocks like Apple, Amazon, Bidu, Rimm, Microsoft, Cisco, Intel and even on ETFs like the QQQQs and GLD. More are coming on line. Weekly options are very lucrative and if you are writing calls, you can turn every Friday into a paycheck.

Read more about Weekly Call Options here.