Guest Article by Stephen M. Bean, M.A.
Owning stock certainly has its “ups and downs” (literally). If you own some, I’m sure you’ve likely noticed. Lee’s white paper entitled “More Money From Stocks You Already Own! certainly tells it like it is. I strongly suggest that you read it. Plus, it’s free.
Yup, the fact is that if you own stocks and don’t regularly sell covered calls on them then you are most certainly regularly tossing money away. Ugh… is that a Maalox moment? So, if selling covered calls is so great then why don’t all people who own stocks sell covered calls?
Simple answer…they just don’t know about the strategy and how to do it. In fact, I have met financial advisors and very savvy money people who don’t know the first thing about selling covered calls. Option trading psychologically affects people in a funny way because it sounds mysterious and complex and risky so they usually just avoid the issue. You know…”the not for me syndrome.”
In truth, gambling in a casino or betting on sports or crossing the street or jumping out of an airplane wearing a parachute is risky, but selling covered calls is totally safe because it has no risk whatsoever. Cool huh? I’ll explain.
In a nutshell, selling covered calls on stocks you already own is risk free because you already own the stocks. The procedure can easily be understood by reading Lee’s well-written explanation in his white paper so I won’t repeat the technical details for you now.
Lee invited me to do this guest blog to expand on the covered call approach, so I thought I would just mention a few “expansions” or nuances so to speak on the subject.
As he says, if you already own the stock and sell covered calls, then there is no additional risk. You assumed the essential risk by purchasing the stock in the first place since, last I looked, stocks don’t come with a guarantee.
Here’s what some folks do. They just buy a stock and then immediately sell a covered call(s) to earn the premium taken in when they sell the call(s). In other words, they just use the stock so they can use the covered call strategy.
If you use this “buy-write” approach then you can run the risk of having the stock drop big time in price and now you are stuck with a stock you really did not want to own in the first place and the amount of premium available when you sell a covered call(s), if the stock drops below what you paid for it, will be much less.
In fact, you may have to sell calls many months into the future just to take in a decent premium when you sell the calls. And, you now have to keep the stock for a longer period of time, which was not your intention in the first place with this strategy. Hence, “buy-write” is no free lunch but lots of people do it. Depends on your risk tolerance I imagine. I guess it takes all kinds of cars to fill up the freeway.
Of course you could sell “naked calls,” without buying the stock, which is described in Lee’s white paper, but it is as he emphasizes, extremely risky and you will likely end up taking Valium on a regular basis if you do…so don’t do it, ever.
Bottom line is this… if you own stocks and they are optionable, which most listed stocks are, then make it your business to learn all about selling covered calls. If you own a lot of stocks you can bank a thrilling amount of money regularly using this strategy, assuming of course that you think that making a lot of money without working very hard is thrilling.
So, I think that selling covered calls is pretty cool but, what if you never want to sell your stock(s) because of the tax consequences as in “capital gains tax,” but they get called away (see Lee’s description of this term)? That’s another issue that may or may not bother you but you need to know it is a possibility. Hey, some people have held stocks for years and they literally love them so they may feel a big sense of loss (emotionally, that is) even though they had made a financial profit.
There are definitely actions you can take to maintain your beloved stock position, avoid incurring capital gains liability, etc. if your stock is about to be called away.
Stephen M. Bean
(Note from Lee: Stephen Bean is a SaferTrader, and extremely knowledgeable concerning ramping up income from your stock portfolio.)
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