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Writing Covered Calls

Many financial advisors and more than a dozen websites advocate writing (selling) covered calls as a sound investment strategy. Thousands of subscribers pay millions of dollars to get advice on profitable covered calls to write.

I believe they are wasting their money. Writing covered calls only limits the potential gain you might enjoy.

Let’s take an example. You buy 100 shares of XYZ for $80 and write (sell) an at-the-money two-month call ($80 strike price) for $4.00. If the stock stays flat, you will earn 5% on your money for the period (plus collect a dividend if there is one). If you can do this six times a year (write a two-month call six times), you will earn 30% annually (less commissions); or so goes the promise.

(In the last chapter we showed that selling calls against a one-year option rather than stock results in a hypothetical 300% gain if the stock stays absolutely flat, or ten times the amount you could earn by writing calls against the stock.)

In this covered call-writing example, 30% is the maximum amount you can earn. No matter how high XYZ goes in price, you can never earn more than 30%. The bottom line truth is that you will NEVER earn that 30%. The reason is that no stock price ever stays the same. If the stock goes up by $5 in the first 60 days, you will either lose your stock (through exercise), or more likely, you will buy back the call you wrote, paying $5, and losing $1 on the call (but making $5 on the increase in the price of the stock). So for the first 60 days, you actually made a 5% net gain ($4 net gain on a $80 stock).

Presumably, you then sell another 60-day at-the-money call (now at the $85 strike) and collect perhaps $4.25. Then the stock falls back to $80. In this time period, you gain $4.25 from selling the call but you lose $5 in stock value for a net loss of $.75.

Your gains on the calls you wrote now total $3.25 for a 120-day period (you gained $4.00 in the first 60-day period and lost $.75 in hoped would earn you 30% for the year). At this rate (four months of activity), your annual return will be $9.75, or 12.2% on the original $80 stock. Commissions on six sales of calls over the year will considerably reduce this return — to 10% or so. Not a bad return, but certainly not 30%. And it’s an awful lot of work for a 10% return.

For a full explanation of an option strategy that is designed to outperform writing covered calls, check out Dr. Terry Allen’s Free Report on calendar spreads.

Terry's Tips Stock Options Trading Blog

December 11, 2017

Floor & Decor Holdings (FND) Is Set To Grow

This week we are featuring another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our portfolios to spot outperforming stocks and place spreads that take advantage of the momentum. The 10 actual option portfolios carried out by Terry's Tips for its paying subscribers have gained an average of 108% for 2017. This is down a little from a few weeks ago because many of the tech stocks that we trade options on have fallen over the past few weeks. We are still pleased with the composite results, however. (One of our newest portfolios adds the Trading Idea of the Week that we send out to you each week to its holdings).

Terry

Floor & Decor Holdings (FND) Is Set To Grow

Investors are optimistic about the outlook for FND after a recent Moody’s upgrade and an upgrade from Zacks Investment Research to a buy rating with a $46.00 price target.

December 5, 2017

Will Essent Group (ESNT) Continue the Momentum?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our portfolios to spot outperforming stocks and place spreads that take advantage of the momentum.

Terry

Will Essent Group (ESNT) Continue the Momentum?

Essent Group has received a lot of attention as of late and several analysts are expecting more upside in the stock price. Here are two of them – Essent Group Earns Outperform Rating from Analysts at Wells Fargo & Company and Zacks: Analysts Anticipate Essent Group Ltd. Will Announce Earnings of $0.77 Per Share.

ESNT has recently seen a pickup of upside momentum after a . . .

November 20, 2017

Facebook (FB): Time to Buy The Dip?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our portfolios to spot outperforming stocks and place spreads that profit if the momentum continues, at least a little.

The last 12 ideas which we have published here which have expired resulted in 11 gains averaging 39% (including the loss which was only 10% on one of the spreads). If you had invested the same amount in each of the 12 ideas, you would have made 468% on that amount. Of course, we can’t promise that future results will be this great.

Terry

Facebook (FB): Time to Buy The Dip?

Several analysts are expecting Facebook stock to continue higher, here are two of them – Facebook Inc Stock Can Still Deliver Value, Event at These Levels and Three stocks to buy on recent weakness.

Making 36%

Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

Learn why Dr. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

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TastyWorks

Tastyworks is a new brokerage firm from the brains behind tastytrade and it is our top choice of options-friendly brokers. Their commission rates are extremely competitive - options trades are only $1 per contract to open and $0 commission to close (all options trades incur a clearing fee of $0.10 per contract). The tastyworks trading platform quickly became our favorite platform for options trading and it keeps getting better with new features released each week. Terry uses tastyworks and loves everything about them!

TD Ameritrade

This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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