After dipping a toe in the market and realizing the pain of trying to find the next “hot stock tip”, some investors are able to get decent returns while limiting their risk with covered calls. However, in order to make writing covered call options work, there are some specific things that should be taken into consideration.
A real-world covered call strategy does not focus on making huge monthly returns with wild stock picks. Those types of companies are usually flame outs and can lose your entire investment capital. Remember that the safest way to approach covered calls is to invest in companies you like and then write calls against them. This works because you already are investing in stocks you feel comfortable owning, and that means you think they will grow over time. That also means that as they grow, you can sell the options against them and improve your returns.
However, the safest stocks can also have the lowest returns with this method, simply because the safest stocks are just not volatile enough to entice the options market. This does not mean you should abandon your basic concept, but you should not limit yourself to just the stocks you are already familiar with. Doing research on other stocks that might be stable but provide a better monthly return could be the best option.
Finding a stock where the underlying company is sound enough to create a solid investment, combined with enough growth to make the stock price attractive to the speculations of the stock market is the key. By doing this, you will avoid buying unknown “flash in the pan” stocks that will drain away your portfolio value, and you will find stocks that give a healthy return while providing steady growth. This is a good way to push much of the investment risk onto others, while reaping the benefits.
From time to time, I allow my reader’s to make guest posts. This is one of them.
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There is a good covered call screener here: Born To Sell Covered Calls