avatarCat S Guan

Summary

The article discusses a covered call strategy in investing, which involves selling call options on stocks owned by the investor, potentially generating additional income while minimizing risk.

Abstract

The article introduces the concept of covered calls, an investment strategy that involves selling call options on stocks already owned by the investor. This strategy is compared to selling a golden ticket with specific conditions, allowing the investor to generate additional income from their stocks. The author emphasizes the importance of choosing stocks with long-term potential and setting a strike price above the purchase price. The article also mentions the use of historical data and time series analysis to predict stock prices. Finally, the author shares their personal experience with the covered call strategy, selling one covered call of META stock and earning a profit.

Opinions

  • Covered calls are a valuable investment strategy that can generate additional income from stocks.
  • The strategy is best suited for stocks with long-term potential and upward trends.
  • Setting the strike price above the purchase price is crucial to maximizing profits.
  • Historical data and time series analysis can be used to predict stock prices and inform covered call decisions.
  • The author's personal experience demonstrates the potential profitability of covered calls.
  • Selling covered calls can be compared to selling a golden ticket with specific conditions.
  • The strategy involves minimal risk, as the investor already owns the underlying stocks.

Investment

Turn Your Stocks into Cash Machines

How to squeeze extra dollars from your (boring) stocks with covered calls

Photo by Markus Winkler on Unsplash

I wish someone had whispered this investment strategy in my ear years ago, back when my stock portfolio was just a fledgling nest of long-term investments.

Consider this a non-secret whispered loudly from the rooftops: anyone who’s anyone in finance, plus a legion of savvy personal investors, knows about this. And yet, here I was, unknowingly leaving a treasure chest of potential thousands unclaimed each year. How’s that for a financial facepalm moment?

So, what’s this all about? Enter the stage: the covered call.

If “covered call” sounds like something a football coach yells during practice, fear not. You’re about to discover how to turn a snoozing stock portfolio into a cash-generating machine — all with minimal risk.

Grab your helmets, folks; it’s game time.

What in the World is a Covered Call?

Calls and Puts are the Batman and Robin of the options world.

Picture an option as a golden ticket — not to Willy Wonka’s factory, but to the splendorous possibility of buying or selling stocks under specific conditions. No candy, but plenty of opportunity for sweetness.

A call is your optimistic friend, betting stocks will soar to the sky, while a put is the gloomy one, expecting them to dive deep into the abyss. But worry not; we’re sticking with calls because we’re all about that positive energy.

“Covered” in this context means you’re not just shouting into the wind. You actually own the stock. It’s like promising to sell your vintage comic book, but only because you actually have it in your possession (and not because you need an excuse to visit your parents’ attic).

Selling a covered call is like saying, “Sure, I’ll sell you my prize pumpkin if it wins the biggest pumpkin contest.” You make a bit of cash just for agreeing, and the worst that happens? You miss out on gloating rights if your pumpkin hits a growth spurt.

Covered calls are your ticket to becoming the cool kid in the investing schoolyard, making money while your stocks do the hokey-pokey in price. Best suited for when you think your stock is more likely to take a nap than sprint.

How to Trade Covered Calls Like a Rockstar

Selecting Your Band Members

First, you need at least 100 shares of stock to kickstart your covered call band. Choose stocks that vibe with you long-term, not just the one-hit wonders.

The golden rule? Aim for stocks you’d swipe right for an upward trend, not those with more drama than your favorite soap opera. Because who wants to earn a little only to watch their investment take a nosedive off the high dive?

Setting the Stage with Your Strike Price

Imagine if selling your stock at a higher price was a missed concert of your favorite band. Heartbreaking, right? That’s the risk we play with covered calls.

So, we set the strike price above our autograph-worthy target. Because selling your stock for less than it’s worth is like selling concert tickets at a discount — they’re worth more than that!

Setting this target is like tuning your guitar. You want it just right — above what you paid, sure, but also leaving room for those dreamy profit gains.

Honestly, picking a target is like trying to predict the finale of a reality TV show — thrilling but darn tricky. I resort to crystal ball gazing (aka using historical data and some sneaky code with time series) to figure out my move, avoiding any dramatic plot twists like earnings calls.

When Your Bull Turns Bearish, It’s Time to Sell

Picture this: You’re at the annual Bullish Investors Gala, proudly dining on the sumptuous main course that is your high-performing stock. Then, out of the blue, the fundamentals shift like a plot twist in a mystery novel. Suddenly, you find your once-beloved bull transforming into a bear right before your eyes, threatening to turn the Gala into a not-so-fancy Bear Picnic.

Holding onto a stock when the fundamentals change for the worse is like trying to keep afloat on a sinking Titanic with a dessert spoon.

Sure, the premiums from the covered call might feel like a fortune cookie handed to you with sage advice, but remember, that’s just the after-dinner mint, not the feast.

Picture attempting to cling onto your stocks as the ship takes on water, all the while insisting, “But look at this lovely fortune cookie I got!”

Moreover, when the stock price begins its nosedive, trying to sell a covered call for a primo price at your dream target is like trying to sell ice in the Antarctic — it’s just not going to fetch the price you were hoping for.

So, when your stock takes a turn for the worse, it might be time to tip your hat, say your goodbyes, and seek greener pastures — or, in this case, more bullish markets.

Remember, there’s always another main course out there, potentially with a tastier fortune cookie awaiting you post-meal.

Fast-Track Your Premiums: Trading Patience for Speed

Think of this optional strategy as the financial equivalent of fast-forwarding through commercials.

Sure, you could wait around for the covered call to expire, like waiting for your favorite TV show to return from a break. But why linger in suspense when the action could resume sooner?

Imagine this: your call’s value drops to a tenth of its original price tag quicker than a celebrity finds themselves in a Twitter scandal. It could happen in a week, while the full expiration drama drags out another seven days. Why endure the financial equivalent of watching paint dry when you can seize the moment (and the profit) faster?

By choosing to “buy to close” early, you’re not just grabbing your profits and running; you’re setting the stage for an encore.

It’s like ending a good magic trick with a flourish, only to prep for an even better one. You get to sell the call again, backed by the very same stalwart stocks, turning what could have been a waiting game into an opportunity for repeated success.

So why wait for the curtain call when you can have the spotlight now?

My World Tour of Covered Calls

I couldn’t wait to try out my own covered calls strategy. Picture me, bright-eyed with 100 shares of META tucked under my arm since 2019, ready for the long haul.

Then came the AI craze, turning the stock market into its own rock concert. Exciting, yes, but every rockstar’s flame risks flickering out. META looked ripe for a covered call debut.

On March 8th, with Prophet predicting META’s price could go as high as $550 on March 22nd, I sold one covered call of META at a strike price of 570 for $2.45. With 100 shares and a $0.66 fee, I earned $234.34 that day.

On March 14th, I bought the covered call back at $0.23. With the $0.66 fee, my total expenditure was $23.66.

Thus, my initial venture into covered calls netted a profit of $210.68.

Talk about an exciting gig, right? Turns out, I wasn’t just part of the audience in the stock market arena; I was up there, mic in hand, making the crowd (and my bank account) go wild.

Hi, I am Cat. I am a writer, artist, and snowboarder disguised as a software engineer during the day. I’d love you to follow me (Cat S Guan) to see my stories on your feed. To have stories sent directly to you, subscribe to my newsletter. 👇

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