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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

August 14, 2017

Cognex (CGNX) Is Set to Make New Records

This week we are featuring a company that was recently added to the Investor’s Business Daily (IBD) Top 50 List. The stock has displayed strong upwards momentum and we look to place spreads that take advantage of this underlying strength.

Terry

Cognex (CGNX) Is Set to Make New Records

Cognex reported earnings at the start of the month which led to a rally above a significant technical hurdle. Cowen has since raised price targets to $135 and Zack's equity research has written a compelling article outlining why they expect further upside in addition to rating the stock as a Strong Buy.

CGNX rallied to a record high after earnings, taking out a notable barrier from a horizontal level at $96.06 as well as the psychological $100.00 price point. The horizontal level had previously held the stock lower on several attempts since early June.

August 8, 2017

Global Payments (GPN) Poised to Break $100 Mark

This week we are discussing a new addition to the Investor’s Business Daily (IBD) Top 50 List. We use this list in one of our portfolios to identify stocks that have displayed strong upward momentum and place spreads to profit from the underlying trend. Actually, the stock price can even fall a little bit for the maximum gain to be realized.

Terry

Global Payments (GPN) Poised to Break $100 Mark

Several analysts have recently refreshed their bullish targets for GPN. Here are two of them – Wells Fargo Upgrades Global Payments (GPN) to Outperform and Global Payments price target raised to $105 from $98 at Barclays.

GPN boasts a strong uptrend and has recently broken above major resistance at $93.31 after correcting lower for five weeks. The stock has regained its 20-day moving average following a turn higher in the second week of July and broke to all-time highs on Friday.

July 31, 2017

Transunion (TRU): A Stable and Consistent Player

This week we are discussing another one of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our portfolio's to find stocks that have displayed consistent upwards momentum and we look to place spreads that take advantage of this underlying strength.

Terry

Transunion (TRU): A Stable and Consistent Player

Several analysts have recently refreshed their bullish outlook towards Transunion. UBS Asset Management has increased their stake in the company and both Morgan Stanley as well as Deutsche Bank have raised their price targets to $50.

Transunion has been trading higher within a rising trend channel since the middle of February. After testing the lower line of the trend channel in the past week, the stock recovered to hit a fresh 52-week high. The $44.45 level held the stock price lower for a month prior to finally breaking above it earlier this month. The level is now viewed as support and its proximity to the 20-day moving average as well as the channel bottom emphasizes the area as strong support.

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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