Covered Call Options
The Covered Call Strategy: A Low-Risk Way To Supercharge Your Cash-Account Returns by 200% – 600%
An Investment U White Paper Report: Part 1
By Karim Rahemtulla, Founder, The Income Trader; Editor, Smart Options Report
What if you could join a select group of investors who routinely own a $12 stock for $9 a $27 stock for $22 or a $47 stock for just $36? Think of the advantage you would have. You’d already have profits in your hands. And if the stock price fell, you’d have a substantial “cushion” before the loss affected you.
Or, what if you could make 4%, 5%, 6% or more from your fixed-income investments like CDs, bonds, preferred stocks? Or how about making six times more interest on your cash accounts than what your bank is currently paying? With FDIC insurance, as well? It is possible, even with interest rates at all-time lows. You just have to know where to look.
So what’s the secret? It’s called covered call options, and our Income Trader - Covered Call Strategy may be the easiest way you’ll ever make money investing. In fact, using just one facet of this system over the last three-year period that included the market meltdown of 2000-2002, Oxford Club members who traded all of that facet’s recommended plays profited on 77 out of 87 trades-a remarkable 88% winning percentage. And there’s no reason to think that this performance won’t continue, and even improve. Because, as you’ll soon see, the investments that are at the core of The Income Trader – A Covered Call Strategy work in any market, at any time. But first here is some background on why this system works so well.
Tapping into a Global Network for Safe-Cash Returns
It all begins with the right connections and access to the best information. Our network of brokers, advisers, and our own crack research staff scours the world for opportunities to make more money for you. For fixed-income we look to every bank in the world that is registered to do business in the U.S.-AND has that critical FDIC stamp of approval. This FDIC insurance guarantees up to $100,000 of your money at a financial institution.
That’s just for CDs and money market accounts. For higher returns we look to investments like preferred stocks and notes.
Imagine getting almost 6% a year from a AAA-rate preferred note. You can do it today.
And, bonds are worth looking at as well. Not the U.S. Treasury bills paying you less than 1%, but high-grade, short-term corporate bonds that pay you four to six times that number. They are out there now.
Finally, to really super-charge those returns, our covered call options strategy employs a proprietary system that has achieved an 80% win rate since inception.
This means that eight out of every 10 picks using this system have made our investors money, in good times and in bad times.
This system is not complicated, but it does require an explanation
Our Goal:
The objective is to make between 12% and 20% a year-far exceeding the rates of return you would get in a money market account or a savings account. Of course there is more risk, but not nearly as much as you may think-and considerably less than you’d take by investing in stocks alone.
By the time you’ve read this report, you’ll not only have a better understanding of how to supercharge your cash-like investments using instruments like corporate bonds, high-yield CDs and preferred stocks you’ll also know more about a covered call options technique that can exponentially increase your portfolio’s earning power.
Covered Call Options: Insulation from Market Meltdowns
Let’s face it. The last few years have been brutal ones for investors. The Dow is still down roughly 20% from its peak in 2000. The Nasdaq has dropped from the 5,000 level all the way down to about 1,900 as I write. All the averages have gone in the tank. Millions of investors have lost billions of dollars. And while a recovery might be at hand, uncertainty remains.
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This is not some kind of get-rich-quick scheme The Income Trader Covered Call strategy targets the following, with a yearly return goal of between 12%-20%:
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Many investors are scared of stocks these days. Even when the market heads higher, they’re still scared. With good reason. Many investors are wondering where to turn to make decent returns, with complete safety.
Well, the good news is that there is a way-an easy way you can lock in safe, steady income from a variety of conservative investments. It’s in covered call options, and we call it our Income Trader – A Covered Call Strategy system.
Before we get into an explanation of how covered call options work, please think for a moment what it could mean to you if you knew of a way to invest $50,000 in a relatively safe income investment earning 16% per year or 24% per year.
At 16%, you would double your money in roughly five years. And at 24% per year your $50,000 would have grown to a mini-fortune of $118,210 in just four years.
And that’s using a covered call investment method that’s so safe it’s been approved by the IRS for use with IRAs and pension funds.
But let’s say you want even more safety
$12,000 in Income, Instead of $36,200 in Losses
Three years ago-just before the Dow slid and the Nasdaq fell off a cliff, you could have invested $50,000 in top-quality preferred issues-shares yielding 6% 7% or even 8% per year. Over the last three years, that investment would have put $9,000, $10,000 or as much as $12,000 in risk-free income in your pockets. (The same investment in Nasdaq shares would have dropped in value-all the way down to about $13,800.)
This is not some kind of get-rich-quick scheme. It’s not some system you can use to earn 50% or more on your investments every year. Instead, it is a way anybody-including you-can use proven, safe investments to build a rock-solid foundation for your economic future.
As you know, every investment expert going-every “guru” worth his or her salt-recommends that you put a percentage of your money to work earning safe, steady income. I’m not reinventing the wheel here. What I am doing is giving you a way to follow that common-sense advice-to put 10% or maybe 20% of your money in safe, secure, income-earning investments and then boost your earnings on those “cash” investments by 200 to 600%.
This System Is as Close to Foolproof as Possible
Once you put our call options method to work for you, you’ll get weekly tips and updates on exactly where and how to tap into the most profitable and powerful income investments available anywhere. It is this weekly communication that keeps you on top of these time-sensitive recommendations.
The covered call options system is simple, really. You see, we’re not looking for huge profits found in what I call “needle in a haystack” stocks. No way. The Oxford Club / Investment U Research Team look for (and find) safe, secure income investments you can use to double triple or quadruple the returns you would expect from typical income investments.
These are the perfect investments you can use to steadily and safely grow the conservative portion of your total investment portfolio-no matter what happens to the stock market or the economy.
So now let’s take a look at the truly compelling strategies we employ with The Income Trader – A Covered Call Strategy.
The Income Trader – A Covered Call Option Strategy’s Supercharged CDs
The Income Trader – A Covered Call Strategy targets high-yield certificates of deposit and finds the best going, including those you won’t hear about anywhere else. CDs paying rates high enough to boost the equity in your conservative portfolio, not just let it stagnate.
That’s correct. Even though typical CD yields are in the tank these days, there are some high-quality certificates available to those in the know. And with The Income Trader – A Covered Call Strategy’s guidance you can take advantage of special opportunities like these
- A five-year certificate of deposit from NetBank or another from the online banking giant Everbank each offering annual yields that are roughly 40% higher than what’s covered in a typical five-year certificate.
- A 10-year CD offered by First Bank of Puerto Rico. This FDIC-insured CD yields 5% per year a hike of 32% when compared with the yield of a 10-year T-note. (But since the bank can “call” the CD for redemption annually during the term of its life-it’s almost like earning 5% on a one-year CD.)
Safe, steady income without risk and without worry whether you’re a retiree, or a beginning investor.
Increasing Risk a Little to Gain a Lot-With Corporate Bonds
But we do more than search out ultra-secure, super-conservative investments like these. In fact, we recommend that you diversify your investments within the conservative portion of your portfolio to include a little more risk for even more reward.
That’s why we also recommend outstanding corporate bond investments, like these (figures based on June 2003 recommendations)
- Ford Motor Company A-rated bond maturing in just 10 months and yielding 4%. That’s an annualized yield of almost 5% on an income investment that’s as safe as one of America’s largest, oldest companies. A good, safe call.
- Tyco Corporation BBB-rated bond maturing in roughly 18 months, yielding 5.6%. Yes, Tyco had some financial problems but the company has cleaned house, recovered, and cleaned up its financial act. The only way this bond could be a loser is if Tyco goes bankrupt in the next 18 months. And our research indicates that’s not likely.
In fact, our research team seeks the safest investments we can find to give investors like you-no matter what your age or investing background-the highest levels of income possible.
Another Part of the Covered Call Strategy: Preferred Shares
High-quality preferred shares are another critical part of the strategy for making your cash investments produce maximum returns. These are some of the safest investments available. These shares offer “locked-in” dividends that make them reliable income investments. And they’re paid before any dividends are paid on common shares (hence why we call them “preferred”). Since these shares pay guaranteed dividends, they typically don’t lose ground when common shares slide. At the same time, the shares offer potential for equity growth.
One example of our approach to preferred shares is a past play with GE Capital Preferred Shares. While the share price held steady, producing no profits (or losses), the guaranteed dividends paid off at a rate of 6% per year-about 600% higher than a typical money market account these days.
Options: An Investor’s “Final Frontier”
But we’re not done yet. In fact, we’re just getting to what I consider to be the heart of The Income Trader – A Covered Call Strategy: the remarkable covered call options plays we use to essentially buy stocks at a discount.
An Explanation on Covered Calls
When investors hear the word “options,” most feel either a chill or a thrill run down their spine. And if you listen to the mainstream press, you’ve probably heard that options mean danger, risk, leverage and potential financial ruin. Not quite.
While it is true that buying options is potentially one of the riskiest investments you can make, that’s not what we’re calling for here. With The Income Trader – A Covered Call Strategy service, we don’t buy options; we sell them.
And, as you’ll see, that makes all the difference in the world-it’s what lets us buy great companies “at a discount” while giving us serious downside protection. It’s also what makes our system a system-not just a random series of options plays.
You see, too many investors view options as a “fast way” to make back the losses they incurred investing in the great technology boom and bust of recent years. And while it’s true that when properly executed, options can produce sizable profits in a short amount of time, they can also shred the portfolios of novice investors-those who don’t fully understand the risk involved.
So right now, before introducing you to The Income Trader – A Covered Call Strategy’s method for buying stocks at a virtual discount, let’s make sure you don’t become a victim of the options game, by explaining what you should know before you set foot into the options market.
So What Are Options Anyway? A Primer on What To Know First
Simply put, options are the right to buy or sell an underlying stock at a certain predetermined price by a predetermined date. And there are two types of options: “call options” and “put options.”
- Call options are a “bet” on the price of the shares moving up.
- Put options are a bet that the share price will go down.
Because options expire, they are very different than owning the shares of a company outright. If the underlying shares don’t do what you want them to do-that is, the share price does not go up if you are buying a call option, or go down if you are buying a put option-then the option may expire worthless.
If you own shares of a company outright, or are selling the shares short, the lifespan of your ownership can be indefinite depending on the performance of the underlying company.
Companies themselves do not issue options; an options market, which creates the product based on several criteria, issues them. For instance, you will find that most lower capitalization stocks don’t have options available. (Of course, there are a lot of companies in the market today that are small-caps that do have options. This is because the options were issued when they were large-caps!)
How Options Work
As I mentioned earlier, options are time-sensitive instruments. But they lose or gain value based not only on the movement of the underlying shares, but also based on the time remaining on the option. The more time left on the option, the more it will be worth. Why? Because there is more time for the share price to go even higher (on a call option) or go even lower (on a put option).
The price of an option is calculated automatically in the marketplace using a model invented by two men: Fischer Black and Myron Scholes. The following variables are integral to the calculations of an option price using the Black-Scholes model:
- Time to Expiration
- Strike Price
- Value of the Underlying Stock
- Implied Volatility of the Underlying Stock
- The Risk-Free Interest Rate
Keep in mind that there will always be exceptions to the rule in certain cases. These exceptions usually arise in markets that are illiquid, meaning there is not enough activity/volatility to determine an accurate price.
Why Trade Options?
Today, there are two reasons to trade options:
1. To invest wisely
2. To gamble recklessly
The gamblers take advantage of the leverage offered by options. Like margin investing, options allow you to control the underlying shares for a fraction of the price of the actual shares. For example, it might cost you $100,000 to buy 1,000 shares of IBM, but you can cover the same 1,000 shares of IBM for $2,000 or $3,000 by using options.
The difference? Options expire. And if IBM does not move in price and direction to where you need it to make money on your investment, then your options will expire worthless. For example:
Let’s say you buy IBM options with a “strike price” of $100 (the strike is the price at which you can exercise your option on IBM). The option costs you $3 per share (for 1,000 shares, that’s $3,000) and expires in one month. In order to make money, IBM shares must trade above $103 ($100 strike plus $3 per share cost of your option), AND, you must sell your option while IBM is above $103.
At expiration, IBM’s price must be over $100 for you to cover and recoup any of your investment and over $103 for you to make any money at all. Basically, this is gambling with a one-month time frame.
A Covered Call Options Strategy for the Non-Gambler
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A Covered Call Options Strategy for the Non-Gambler
Options can be more effective as a tool for risk management. Since you can buy options to either sell or buy shares at a predetermined price, you can effectively buy put options on the market as insurance against an overall downturn in your portfolio.
Or you can even generate income through options by selling them against the quality holdings in your portfolio (the covered call options technique). For example:
If you own 1,000 shares of Merck and your cost was $50 per share, you could sell someone the right to buy your Merck from you at $60 in 12 months. For that right, you will receive a certain amount of money (the cost of the premium). Let’s assume the premium is $2 per share. Your (adjusted) cost would now be $48, and your upside would be limited to $60 (or 20%). Then if Merck does not cross $60 at expiration, you keep your shares, as well as the premium received.
In this sense options can be compared to loaded guns. In the hands of the wrong person, both can have devastating consequences. But, when used correctly, either can be a good defensive weapon.
The Best Way to Trade Options
Options trade on five exchanges:
- Chicago
- Philadelphia
- The American Exchange
- The Independent Exchange
- The Pacific Exchange.
In one sense, they trade like regular stocks-they have a bid price and an offer price.
However, there are some significant differences. Options trade in lots of 100 shares for the most part. Each 100-share lot is called a contract. So when you see an option bidding $2.20 and offering $2.35, you are looking at 100 x $2.20-or $220 per contract on the bid vs. $235 on the offer in this example.
And it’s very important to realize that the price you see quoted by your computer or your broker may not be the best price.
Our Options Recommendations:
- ALWAYS ask what the price is on the other exchanges. I have found that the best price is hardly ever what your broker quotes to you what a surprise.
- You can and should buy/sell options using limit orders. Just like stocks, you can place trades between the bid and offer, in five-cent increments. Use this technique if you are not in a hurry.
- When using stop-loss or trailing stops on options, be aware that the spread may not be your friend. For example:
Let’s say you bought an option for $1 and set a 25% stop loss. That would imply $0.75 as your exit price. Well, if the option trades at a bid price of $0.70 and an offer price of $0.95, would you sell? After all, the price to buy the option is still 20 cents above your stop-loss while the price to sell the option is 5 cents below your stop loss. I use the mid-point as a guideline. In this case, use $0.80 on the offer to determine the sell.
Here Are Two More Considerations for Trading Options:
1) You’ll need to open a margin account-and to do so, you’ll need to demonstrate that you have experience trading options. You demonstrate this by filling out a questionnaire. (The only time this will not be the case is when you are practicing a covered call option strategy where you already own the shares.)
2) If you are using the covered call options method, in which you buy the shares outright and sell options against your shares (as we do through The Income Trader – A Covered Call Strategy), this strategy is allowed in retirement accounts. All other options strategies must be executed in non-retirement accounts.
Good investing,
Karim
Move on to Part 2 of our Covered Call Options white paper
P.S. I also encourage you to sign up for the free, twice-weekly Investment U E-Letter, headed up by New York Times best-selling author Dr. Steve Sjuggerud. It’s full of actionable investing wisdom you can put to use right away to become a better investor.
To inquire about enrollment in The Income Trader: A Covered Call Options Strategy, please call 800-992-0205, or email oxford@oxfordclub.com.
Related Articles:
- Put Call Ratio: Using Options to Tell When Stocks Are About to Fall
- Options Trading Education: Three Tips to Save You From an Options Nightmare
- Options Trading with Vic Sperandeo: Myths and Realities
View the complete Covered Call Options white paper in .PDF format
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