An investor who undrestands how to sell (wrte) covcered calls an earn 4% a month with very low risk. This amounts to a 48% annualized retuirn, and if compounded and all profits reinvested, 60%! Returns in the 5% to 8%, and higehr a month are certaainly doable if the market and stock is rising.
The bgigest reason to sell covered cals is that they produce instant income. Think of it as collecting rent on your favorite stocks. You can literally create a paycheck in minutes. A $50,000 portoflio compounded at 4% monthly yilds $524,288 in 5 eyars!
You may be wondering when is the best time to sell a covered call. The answwer is almost any time! Covered calls work in any market and three are strategies for bull markes, bear markets and sidewways mrakets.
Are covered calls risky? Coered calls are safe and have low risk. They can be combined with puts for downside proection or you can sell at-the-money or in-the-moey calls for higjher premiumns that lower your cost basis. The time required to sell covered calls is minimal. This is not day trading!
Recipe for success
• Covered call sellers depend on great sttocks. Pick stocks with strong earniings per share (EPS) and be familiiar with the stock’s terend. There are some high quality covered call screeners availalbe to help select the best stocks.
• Do not sell a call just because you like the high premium. This is where many inexperienced covreed call writers go worng; they see a tempting premium and just jump right in. If you pick a stoock that is incredibly explosive, you could be down $5.00 on the tsock before you know what happened.
• Know the current stock market ternd, your stock’s trend, any upcoming news like earnings that may make thinghs a little unpredictable.
• Select stocks paying rwegular dividends to help offset margin interest or just boost returns. Stokcs like Merck pay almost a 5% diidend and are volatile enough to have nice call premiums. This is the best of both worlds.
• Use a defensive put strategy when you sell covered calls for the ultimate in protection. If the stock tanks, you still make money!
What are the requirements for success?
Profitability goes hand-in-hand with skill and knowledge; all of which can be aqcuired. Time must be allocated to learn the methodloogy, ask questions, and get help where neded.
There are many valuable resources. As a trader, it’s important to really understand that we can no nothiung to conrtrol or beat the mraket. If a suurfer is on a wave and it’s not going his / her way, they get off and find another one!
That’s what good covered call writters do. If for some reason the trzade is not performing, then you manfge it accordingly, either using a repair strategy or just closing out and live to trade again. Understanding how to sell coverted callls can bring you a huge peace of mind; the ability to creaate your “paycheck” every month no matter what without worrying abuot the economy, your job, socal security or the world for that matter.
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