Individual investors need to take a serious look at covered calls. This is especially true for investors who feel options are a highly risky trading vehicle.
So, what is a covered call?
By definition…a covered call is a conservative options strategy whereby an investor holds a stock or ETF in an asset and sells call options on that same asset to generate increased income. Unlike buying options outright, covered calls are a conservative strategy. In fact, covered calls are the only options strategy that is allowed in retirement accounts.
All you need to initiate the strategy is 100 shares of stock and a liquid options market. By liquid, I mean options with significant volume . If you own at least 100 shares of stock, then you have the ability to “sell a call” against your stock (assuming it has options, which most do). Remember, 100 shares of stock equals one option contract.
So why sell covered calls?
If you wish to bring in residual income on a consistent basis or if your market forecast is neutral to moderately bullish selling covered calls is the appropriate options strategy.
Back in late June I wrote an article about “the next bull market.” Before I go any further, let me give you a brief summary about the VIX and how it works . . . in simplified terms.
In my last post, I defined each part that makes up an options quote, and most are easy to understand. The exception – OPRA.
I want to go over what a standard options quote looks like and then we can expand from there.
The following two concepts will change the way you think about trading, and investing for that matter, forever.
I want to discuss the mathematics behind the madness of options trading and why options are the only investment tool that offers investors a probability of success over 50%, and in many cases, over 80%.