Can You Make Money With Covered Calls

Some advisers and more than than a few investors believe selling "Covered Calls" is a fashion of generating "gratis money." Unfortunately, this isn't truthful. While this strategy could piece of work for investors whose focus is immediate greenbacks to pay bills, it likely won't work for investors whose focus is on long-term total return. For investors with immediate greenbacks needs I favor dividend-paying stocks, selling (hopefully) appreciated securities or, every bit a final resort given today's historically depression-interest rates, bond interest income.

Allow's review Covered Calls and selling them.

The seller of a Call option on a stock gives the buyer the correct to buy 100 shares of its stock from the seller for a fixed toll, chosen the exercise price, until a fixed date, called the expiration engagement. The buyer pays the seller a premium.

A Call option is called "in the money" or "ITM" when the stock's toll is higher than the option's exercise price. Information technology'southward chosen "out of the coin" or "OTM" when the stock'south price is less than the exercise toll. The more OTM the Telephone call is the smaller the premium.

When an investor sells a Covered Phone call, she is selling a Call pick on a stock that the investor already owns. One common strategy is to sell a "slightly" OTM Call, collect the premium and hope the Call never gets ITM before the expiration engagement. In that instance the seller keeps both the premium and the stock. However, if the pick is ITM at the expiration engagement, the seller has 2 choices: buy back the Phone call at its electric current price and keep the stock; or permit the stock be called away and receive the practise toll non its higher current stock price. In either case, selling the Call will have likely lowered his total return.

This strategy besides may negatively touch total returns because it's not unusual for the bulk of the return in a well-diversified portfolio to come from relatively few stocks. If these stocks are called away, the investor is left with mediocre or worse performers, likely lowering full return.

When ownership or selling a stock the investor has relatively uncomplicated means to evaluate whether he is receiving a "off-white" cost; for instance, looking at earnings and earnings growth relative to the price-to-earnings ratio. There is no uncomplicated mode to do this for a Call. At that place are various circuitous formulas like "Black-Scholes" and the "Cox-Ross-Rubenstein" model that can provide guidance. Nevertheless, in my feel few average investors employ them, but professional person investors who they're competing against exercise.

Another issue is the options market is "thin" compared to the stock market. This ways there are far fewer trades. This causes the bid to ask spread to exist wider than for stocks. For case, on Apple tree (AAPL) stock the spread is about a tenth of a pct; on its slightly OTM Calls its about 2%. That is extra dollars out of the investor'due south pocket.

For investors still interested in this strategy in that location are exchange-traded funds and mutual funds that utilise information technology. Morningstar can provide farther information.

All information and forecasts are for illustrative purposes just and not an inducement to buy or sell any security. By performance is not indicative of future results. If you have a financial event that you would similar to see discussed in this column or have other comments or questions, Robert Stepleman tin exist reached c/o Dow Wealth Management, 8205 Nature'due south Way, Lakewood Ranch, FL 34202 or at rsstepl@tampabay.rr.com. He offers advisory services through Bolton Global Asset Direction, an SEC-registered investment adviser and is associated Dow Wealth Direction, LLC.

Source: https://www.heraldtribune.com/story/business/2021/09/06/robert-stepleman-selling-covered-calls-not-free-money/5665733001/

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