Covered Call Investing

Why do a covered call?

Covered calls are a great way to enhance returns from a stock portfolio. This strategy is particularly attractive in flat or slow moving markets, but can also be used on some stocks in upward trending markets as well. This strategy is considered neutral to slightly biased to the upside. So, it is not for falling markets at all.

Who should use them?

The conservative to moderate investor will find this strategy particularly attractive. Aggressive investors may use it from time to time to protect assets and keep returns positive.

What do we look for?

We look for stocks that are rated buy or hold as our starting point. Once this is established, we look for stocks where we can make at least 4% in the next 30-45 days. Next, we compare the current price to the strike price of the option to determine our initial stance on the stock. After that, we analyze the chart to see where the stock is heading in the next 30-45 days. Is it likely to at least hold its current price and/or increase to the strike price?

Next: do we want to, at least in theory, buy and hold the stock forever similar to Warren Buffet or would we like to be exercised at the expiry date? If the former, then we look for stocks NOT likely to reach the strike price. If we do not want to hold the stock beyond the next option expiry date then we prefer stocks that will reach the strike price. Either way we want at least 4% not called out. Whatever we make from price appreciation is a bonus.

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