I am currently reading all I can find on covered calls. My search began when I heard them discussed in passing during a financial seminar (which by the way was a waste of time, thank goodness I didn't pay for those tickets). My search began last night and to my surprise it seems information on covered calls is very popular, everyone wants you to buy their info as they promise a reliable passive income in the tens of thousands with their information. As I searched deeper I found free information on the Internet which described how covered calls work and what is needed to get started.
I soon wondered if it was possible to trade call options over the Internet using my TD Ameritrade account. At TD Ameritrade, in order to trade options (which what a covered call really is) you need to first apply by use of a form supplied by them.
After reading the remainder of the free material I found, I came to realize that someone could earn as much as 4-6% per month on their investment, which equals a respectable 48-72% a year. Also keep in mind, this investment strategy is so safe, it can often be used for college and retirement savings.
Tonight I will use the form supplied by TD Ameritrade and apply for the permission to trade options.
2 comments:
"Also keep in mind, this investment strategy is so safe, it can often be used for college and retirement savings."
That statement is absolutely wrong! Sorry to be so direct, but you need to realize the risks. I have looked into covered calls for a while, and there is significant risk.
Here is why: You only make money if the stock goes up or sideways. What happens however when the stock prices drop? You do get a payment from the covered call you sold, but when the stock drops by more than the money you got from the covered call, you still lose money.
On the other hand, if the stock goes up big, you still only get the price of the covered call, and nothing extra.
For example:
Let's say you purchase a stock for $100, and sell a covered call on it with basis $100. Let's say you get $10 for the option.
If the stock price rises to $150, you still only get the $100 back, as well as the $10 premium, for a $10 gain.
If the stock price drops to $50 however, you don't have to deliver the stock, but if you were to realize all gains/losses, you would have a loss of $50 on the stock and a gain of $10 on the option, for a total loss of $40.
So, as you can see, your downside risk is almost unlimited.
Of course, the time value of the option works for you, so in the long run, you should make money. However, it's not as easy as you made it sound with the statement above.
@tburg - thanks for the comment.
Covered calls like any investment strategy involving stock trading has inherent risks.
What I meant by that was... covered calls are a safe enough strategy, that also involve option trading (usually considered more risky then conventional stock trading) to be considered.
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