Building Wealth Earlier this month, we featured a series of essays on the benefits of trading options... specifically selling covered calls.
I also hosted a live training session to teach people how to sell options to boost your income, safely.
We received many questions from readers on selling options. Today, we'll answer some of the most common...
Have you traded options before? If so, we want to hear about your experience. If not, what's holding you back? Let us know at [email protected].
Q: Who actually determines the calendar months that options trade in? There doesn't seem to me to be a rhyme or reason to it, but there no doubt is. – K.H.
A: Some stocks just have options that expire on the third Friday of the month, but the exchanges determine the dates and strikes. As volume increases in options, the exchanges have typically increased both months and strikes.
And in 2014, weekly options became available. So today, many stocks have options expiring nearly every Friday – like Apple, for instance.
Q: If you sell, to open, a covered call for shares you own... do you lose dividends? – G.C.
A: When you sell a covered call, you have to own shares – whether you own them already or you buy them when you sell the call. As a shareholder, you're entitled to receive dividends.
Put sellers don't receive a dividend because they don't hold shares.
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Q: I can't sell puts in my IRA. – J.B.
A: The government prohibits selling naked puts in an IRA. You can, however, sell cash-secured puts – puts that are 100% backed by cash. Or you can sell covered calls in an IRA. In Retirement Trader, I call selling covered calls our "IRA Alternative" trades.
Whether you sell a covered call, naked put, or a cash-secured put, the return of each trade is similar, based on the amount of capital at risk (your potential obligation to put on the trade). It's just a different way to put on the same trade.
The biggest difference is that a naked put requires less cash upfront. For puts, you have to put up "margin," usually about 20% of the money you would be obligated to pay if the option is executed against you. A cash-secured put requires 100% of the money you would be obligated to pay. With a covered call, you have to buy shares in the stock.
When you see a difference in gains between naked puts and cash-secured puts and calls, this reflects the initial capital outlay. But remember... the put may be obligate you to pay the other 80% if the stock is put to you. That's a real obligation, and when you factor that in... your gains are roughly the same.
I hope you understand why this strategy is so profitable... and safe.
Since I launched my Retirement Trader letter in 2010, my subscribers have enjoyed 262 winning positions out of 281 – a 93.2% win rate – with an average return of 6% on each trade (or around 38.1% annualized).
Even better, after a market correction is a great time to initiate a covered-call strategy. Selling covered calls lets you "earn your way out" of a position that's in the red.
If you have a position in the red, you owe it to yourself to learn this strategy... and how you can put it to use in your trading account.
In every issue of my investment newsletter – Retirement Trader – I give all the best trades I find with this strategy.
It doesn't matter what your experience level is or what previous successes or failures you've had in the market. The only thing you need is an open mind.
And right now, you can get a lifetime subscription for just over what you previously had to pay for less than a single year.
But you only have until January 31 at midnight to get this deal.
What We're Reading...
- The New York Stock Exchange is proposing rule changes to prevent "market mayhem."