Making Money with Covered Calls

Covered call writing is the most elementary and conservative of all option strategies. It is so conservative that it is the only option strategy allowed in retirement accounts (IRA).

The best way to look at covered call writing is to look at the option market as a business. The merchandise with which you run your business are stocks you hold in your investment portfolio. If you own common stock, you should be involved in the business of covered call writing. If you are not, you are letting your inventory go to waste. You are not opening your store for business.

For example, when you own rental property, you rent it and you want this rental income each and every month as part of your return on that investment. The same analogy can be made for the stock market. You must look at your stock investments as you would an investment property. If you buy a good property in a good position are you afraid of not getting your money back over the long term? Do you get a weekly valuation of the property and stress if that valuation is less than what you paid for it? No. You take a long term view and let time run its course and you collect your rent each month.

With covered call writing we you must understand that the stock prices of good companies go up and down just like real estate values.  If you purchase a good company with real earnings at a reasonable valuation and the stock falls, it is likely that eventually the stock price will go back to where it was when you purchased it. Even if it doesn’t, eventually you will make back all the money you invested in the stock by selling calls against it.

This is the mindset of a covered call writer. This is for educational use only and not financial advice.

About the author:

Larry Gaines has an extensive knowledge of the equity and option markets with over 25 years of trading experience. His experience includes managing one of the world’s largest international oil trading companies for over 10 years. Additionally, he managed a proprietary securities trading company that traded equity futures, bonds and foreign exchange. More recently, he traded and consulted for an international hedge fund trading equity futures, bond futures, and foreign exchange for 5 years. Larry first started trading options 20 years ago on cargoes of North Sea, Brent crude oil. His education includes a B.A. in Finance from The University of Texas.

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