Author: William Onedge Added: October 7, 2008
Whether your goal is to create immediate income or to build towards the future without sacrificing your comfort level you'll find that by writing covered calls you'll thrive through good, volatile, and bad times and consistently enjoy higher average returns than stocks alone will provide. You can use the conservative, money making strategy practiced by highly successful options investors and make consistent income without high risk. The strategy of selling covered calls can yield consistent income without high risk. There are numerous approaches to writing a covered call, here are two of the strategies. The in the money calls, and the out of the money calls. The in the money call, is when you set the strike price below your purchase price and out of the money call is when you set your strike price above what the stock cost. The in the money covered call are conservative investments, and the out of the money covered calls our less conservative investments. Here are examples: 1.) XYZ has a current market price of $11.43 per share. The strike price is $10.00 per share for the current month options and the option is selling for 1.95 per share. This stock could fall 12.5%, ($11.43 to $10.00) and you will make 4.55% return.This is how it works. You pay 11,430.00 for the stock.You receive $1,950.00 for the option and $10,000.00 for the stock, a total of $11,950. Your gain would be $520.00, or 4.55% return.You are covered by 12.5% on the bottom side. The stock had to drop below $10. per share before you reduce your gain. Also your breakeven point is $9.48 per share. That can make consistent income without high risk. 2.) XYZ has a current market price of $9.80 per share. You sell the option for $.55 per share, or $55.00 per contract. The strike price would be $10.00 per share and the time frame would be for 1 month. Lets say you have 1,000 shares of this stock. you sell these one month options, 1,000 shares or 10 contracts and the stock closes below $10 per share at expiration, you would keep the $550 and also retain the stock, a 5.6% return. If the stock exceeded the $10 per share, your stock options would be exercised and you would receive 10,000, ($10 times 1,000 shares). But, since you only paid $9.80 per share, you would pick up an additional $.20 per share or $200, increasing your profit to$750,a 7.7% return. Now can you imagine doing this 12 times a year? Well that is how many times you can do it with any given stock. This would give the investor between 73% to 92% returns or better, with a minimum risk. Remember you are talking about 10 wins out of 10 tries, with minimal risk. If you stick to this system, it is possible to turn $10,000 in to $155,000 to $216,000 in only 5 years. That would generate a 5 year compounded return of 2,060% or an average annual return of 414%. (2,060% divided by 5) You can make consistent income without high risk. You may ask how can this be? Well it is because the income is compounded, and each year the base amount is increased by the prior years gains. Actually, these monthly gains can be reinvested immediately, resulting in potential higher returns. Now that's profits for the Conservative Investor! You can make consistent income without high risk. Covered calls can provide a great way to enter the market and because of the leverage options have you can get a very good return on your money. It just takes a little knowledge and some discipline to meet your goals of becoming profitable investor.
--- At conservativetrader.com they have many resources to help the small investor and trader become more profitable.If you want to learn to reduce risk and become more profitable visit us at http://www.conservativetrader.com for more information.
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