Iran and oil prices have dominated the headlines of late, but despite that, the major indexes are holding up near their all-time highs.
And even though trading has been range-bound for months, and some areas of the market have been dragged down (looking at you, software stocks), the bull market remains intact.
So, it makes sense to continue taking advantage of bullish options strategies like covered calls. In fact, a covered call is ideal for an environment in which upside is capped, as it has been for the last few months.
If you’re long-term bullish on a position that isn’t showing a ton of momentum lately, you can sell covered calls to make more money on stocks you already own.
The risk of covered calls is sacrificing some of your upside potential to put immediate cash in your pocket, but if you’re neutral on a position in the near term, you can squeeze extra profits out of existing positions without adding downside risk to your portfolio.
Keep in mind, covered calls are a bullish trade, so if you’re bearish on a stock, a covered call strategy isn’t ideal to repair a broken position. Cutting bait may be the better option there.
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How to Sell Covered Calls to Make Money on Stocks You Own
A covered call is a strategy that consists of owning an underlying stock and selling an option against the stock. Since a call option represents 100 shares of the underlying stock, you can sell one call against each 100 shares of stock you own. Because you own the stock, your short call position is “covered” by the stock.
A short option position by itself (without the stock) is very risky and requires a substantial margin balance.
A short call on a stock you own, on the other hand, is a very conservative strategy that requires no margin.
I would recommend a covered call options strategy against virtually any stock an investor holds. In my mind, it’s free money, and best of all, it’s a great way to start learning about options and options trading.
Let’s dive a bit deeper into how to sell covered calls with a stock that’s recently backed off its highs.
Had I bought 100 shares of Microsoft (MSFT) a month ago, after 30 days I would be down 1.6%.
However, with MSFT trading at 406, if I sold an April 17, 420 call for $9.30 against my stock holding (which is actually $930), my yield could be 2.3% if MSFT trades sideways (or even modestly higher) and the calls expire worthless.
And, if MSFT has a repeat of last month, the proceeds from the covered calls would offset the unrealized losses on the position and actually turn the position profitable for the month-plus holding period.
The downside to this strategy is that by selling a call against my stock holdings, if MSFT exploded higher, I would not participate in the large stock gains, as the buyer of the call would have exercised his right to buy the stock from me. In the case of MSFT, I would make money until the stock traded above 420; however, above 420, my profits would be capped.
The net result is that I would outperform by selling a call if MSFT closes up to 429.30 on expiration (because of the $9.30 premium received), but would underperform if MSFT traded above that.
I’d also outperform should shares fall, because the covered call would offset a portion of my losses.
This is the exact strategy we use at Cabot Profit Booster, where we sell covered calls on Mike Cintolo’s weekly Cabot Top Ten Trader stock picks, which are 10 of the week’s strongest momentum stocks. We are looking to buy the best-looking stocks, as chosen by Mike, and then sell covered calls against those stocks to rack up yields ranging from 3-20% month after month.
If those sound like the kinds of monthly returns you’d be interested in – or if you simply want to learn more about covered calls or options trading in general – click here to become a Cabot Profit Booster subscriber.
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*This post is periodically updated to reflect market conditions.
