Investment U

The Covered Call Strategy: A Low-Risk Way To Supercharge Your Cash-Account Returns by 200% – 600%
Part 2 of our Investment U White Paper Report (Return to Part 1)
By Karim rahemtulla, founder, The Income Trader, Editor, Smart Options Report

The Professional’s Advantage

Most people cannot and should not trade options.

That being said, those who understand options can do very well trading them. It’s like a poker game with average players at the table. If you don’t know the game well, you’re likely to lose. But if you’re the best player in the game, your chances of winning are much improved.

And that’s the underlying theory of our covered call options methodology. We don’t play a fool’s game when it comes to options. And I’d like to think we know the game a little better than most.

Here’s an example

The vast majority of options players will find a stock they think is going to move up or down. Then they track down the cheapest option they can find, place their bet and hope they win. Usually they lose. Why? Because the stock doesn’t move high or low enough in the direction they wanted in the time it needed to.

Few investors, for instance, have the savvy to employ our covered call options techniqueone in which the investor sells an option into the market against a stock, thus returning an “instant profit” on the stock.

The Creative, Savvy Way to Buy Stocks “At a Discount”

I can buy a share of stock for around $31. If it moves to $35 over the next few months, I make a $4-per-share profit (or 12%). However, few investors know that I could sell a $35 October call option into the market and get paid $3 per share for it, thus making the actual price I paid for my stock $28. Then if the stock moves to $35 by October of this year, my profit would be $7 (or 25%).

In this example, I’ve managed to double my returns through a clever use of options. And, if the stock falls $3 in the coming months, anyone who paid full price for the stock would have lost just over 10%. My loss? Zero. Because the net price I paid for the stock was $28.

To me, that’s a clever use of options. And it’s why the Income Trader – A Covered Call Strategy has produced winners on eight out of 10 trades over the last three-plus years.

So, investors have two choices. Gamble and buy an option based on your best hunch-then hope that time and price don’t move against you. Or, use options the way the pros use them-creatively, and as a tool for exploiting the always-present opportunities in the marketplace.

Choosing the latter affords the opportunity to cash in winning trades up to eight out of 10 times, just as we did using a covered call options strategy (a part of The Income Trader – A Covered Call Strategy) over the last three-year span.

It Doesn’t Get Any Better (or Easier) Than 16 Out of 16 Winners

The following lists 16 of our recent covered call trades that form a portion of The Income Trader – A Covered Call Strategy, and it gives an idea of the types of profits we make and the time it takes to make them.

• 8.46% profits with Lucent in 77 days
• 4.3% profits with Calpine in 59 days
• 7.91% profits with Motorola in 47 days
• 5.11% profits with Sealed Air Corp. in 29 days
• 6.61% profits with Corning in 35 days
• 9.46% profits with Motorola in 53 days
• 3% profits with Lucent in 25 days
• 4.78% profits with Motorola in 43 days
• 5.89% profits with Albertsons in 77 days
• 4.47% profits with Bell South in 44 days
• 7.06% profits with McDonald’s in 113 days
• 8.06% profits with SBC Comm. in 98 days
• 3.95% profits with Motorola in 7 days
• 9.21% profits with Satyam Information in 41 days
• 9.38% profits with BancOne in 92 days
• 6.45% profits with SBC Comm. in 50 days

But what’s important here is that these winners averaged a 6.7% gain over a 53-day holding period. This translates to better than 46% annualized profits-almost double the 24% gains our system targets with its recommendations.

But let’s be conservative for a moment. Let’s presume our average profits merely match the 1.5% profits per month (18% annually) that we target with this system. The chart below compares how quickly $25,000 grows at 18% compared to the market’s average historical gain of 11%. That difference becomes enormous over 5, 10, 15 and 20 years.

As the numbers prove, that 1%-plus additional monthly return can mean the difference between a $200,000 retirement nest egg and a $680,000 one.

And what’s even more remarkable is this: The covered call options strategy we use as a part of The Income Trader – A Covered Call Strategy is actually safer than buying stocks outright.

It’s so safe, in fact, that this strategy has been approved by both the I.R.S. and Revenue Canada for use by pension fund managers and investment advisors in their clients’ registered retirement savings accounts.

Now here’s a real life example of how this incredible strategy works-and why it can put so much money in your pocket year after year

A $12 Stock for Less Than $9 a Share

Here’s what I told investors about EMC when I recommended it

“I believe EMC is a good company worth owning at today’s low price. It has fallen hard off its 52-week high. It’s rock solid, has little debt, lots of cash and owns a virtual stranglehold on the high-end data-storage market. In fact, it was thanks to EMC’s storage products that the stock markets were able to open so quickly after Sept. 11-because they had the entire market database and closing prices replicated on their storage products. In short, business needs what EMC sells. And when the economy rebounds, EMC will prosper.”

When I recommended the stock, it was attractively priced at $12.60. But Income Trader – A Covered Call Strategy subscribers who followed my advice were able to own it for $8.90-a 25% discount. We did so by first buying our shares at market value ($12.60), and then we executed a covered call. This means that at the time we bought our shares we simultan-eously sold a call option into the market-an option that was immediately bought by another options trader. That’s our discount, and here are the numbers that prove it:

Specifically, we sold a January $10 call option (valued at $3.70, as set by the market) into the options market. The $3.70 we were paid for the option was subtracted from our stock price ($12.60). As a result, the net price we paid for EMC was $8.90.

This gives us a tremendous advantage, since it means that so long as EMC doesn’t fall another 25%-and close below $8.90 per share-we’ve made money.

So What’s the Catch? Well, There Is OneBut It’s Not Necessarily a Bad Thing

Because we sold a “call” option (the right to buy a certain stock at a certain price, within a certain period of time), if EMC moves above $10 a share any time before the January expiration, the option will be exercised. And we’ll be obligated to sell our shares for $10.

We don’t care though. We’re winners when it happens. Remember, we paid $8.90 for each share.

So, when the option is exercised, and our shares are bought from us for $10 per, we’ll make a 12% profit in just over three months-which is well above the 2 to 3% monthly profits (24 to 36% profits per year) we hope for.

But two other things could have also happened.

Covered Call Options: Even If the Stock Falls 20%-We Make Money

EMC could have never traded above $10, which meant nobody would exercise their $10 option by January.

And that’s fine with us. We still owned the shares. And because we only paid $8.90 net for the company, we were still up 6.7% (while those who paid full price for the stock were down over 20%).

And we were under no further obligation to surrender the shares at any price. So we could either have held onto the company’s shares as long as we wanted and waited for another rebound-or we could have sold another covered call into the market further reducing the net price we paid for the stock.

Even if EMC did the unexpected and fell, say, 35% in price in weeks, we were better off than most.

That’s because those who paid full price for the stock would have been out over $4.40 per share. Our loss would have been much less-only 70 cents per share, or around 8%.

Now, those who paid full price would have needed a 56% jump in the price of the stock to get back to even. On the other hand, we would need EMC to rise just 10% to be back in the black. And in this market-that kind of move can happen in a single day.

Of course that last scenario rarely happens. In fact, it only happened to us five out of 87 times. Most often, the options we sell into the market are exercised by the expiration date-and we walk away with profits in hand.

‘Success’ Rides on the Types of Options Selected

Our rate of success is no fluke. There are a couple of reasons we’re successful so often. Of course, much of our success can be attributed to the type of options we select. They’re called “deep-in-the-money” call options. Deep-in-the-money means that the current value of the shares already exceeds the future value of the options we’re selling. And that’s why these plays earn a conservative 2% to 3% each month.

But another major part of The Income Trader – A Covered Call Strategy is that we buy only those companies that we consider fundamentally undervalued-franchise names in strong sectors that have been beaten down for the wrong reasons companies with low debt, strong futures, good products that people need and substantial cash positions. In other words, companies we’d want to own anyway.

The Better the Company, the Cheaper We Can Own It and the More Sure Our Profits Are

Ironically, the better the company, the cheaper we can usually buy it. That’s because the brighter the outlook for a company, the higher premium options traders are willing to pay for a “call” option-which, as you remember, is the right to buy the stock at a later date.

And the more expensive the option-the greater our discount.

At the time of our EMC play, it was such a strong company that-barring a global economic meltdown-we expected it to close well above the $10 call price and for us to take our profit with relative ease come January

And that’s just what happened. EMC closed above our strike price of $10 and we made 8.3% on this trade alone.

But here’s the thing

EMC isn’t the only company available to make us profits. Right now, the market’s ripe with good, undervalued companies that can be bought at a substantial discount using The Income Trader – A Covered Call Strategy.

By targeting many good opportunities like EMC at any given time, suddenly those safe-but-small gains really start to add up.

And by the time you read this report, I’m confident we’ll also make our targeted profits in the weeks ahead with our other open positions as well.

But here’s the most remarkable thing about it. Should our open positions fall even 25% before we sell them-we’ll still break even.

That’s how much we’re protected on the downside using The Income Trader – A Covered Call Strategy technique. We’ll still have every penny of our investment capital in hand.

A Growing Legion of Income Trader – A Covered Call Strategy Believers

No wonder so many Oxford Club members have become believers in The Income Trader – A Covered Call Strategy.

Many, in fact, have told me they’re so thrilled with the safe and steady profits that they’ve decided to replace all thir straight-up stock plays with this covered call trading strategy exclusively.

Others are using the system to bolster the profits of long-suffering IRA accounts-all the while reducing market risk and deferring their capital gains taxes.

Others simply write to tell me how satisfied they are with the profits they’re making:

• “I’m thrilled with the service. While I haven’t availed myself of all your recommen-dations (shame on me), I have achieved a net gain of over $14,000 from seven of the recommendations. Rest assured I will be continuing my association with you for continued profits ahead.” Shirley N.

• “I must tell you this is a great service. You have helped me make some nice returns, but more importantly you have opened my eyes to a different way of investing. For that, I thank you. I am intrigued by the idea of locking in profits, similar to the recommendation today, while receiving a decent dividend while you wait. Very cool. Thanks again.” Bill F.

These people have good reason to be pleased. Because quite frankly, there’s not a better, safer way to profit consistently in any market-especially in today’s topsy-turvy environment.

A Sophisticated Covered Call Options Trading System Made Simple

The Income Trader – A Covered Call Strategy is a sophisticated trading strategy made very simple.

I do all the research for you by uncovering the very best recommendations with the very best chance of succeeding. I put together each play and pass it on to you.

And, with interest rates moving even lower, it is critical that you make REAL returns on your cash and cash-like investments.

Do you realize that by having your money sit in a “safe” savings account you are actually LOSING money when inflation and taxes are factored in?

With inflation running at 1.5% to 2%, you need to make just that much to prevent erosion of your wealth.

The average savings accounts now pay less than 0.5% per year

Perhaps most importantly, we have history on our side-a history that tells us markets always move higher in the months following times of war and crisis.

For More Information

To learn more about The Income Trader – A Covered Call Strategy or to subscribe, simply call 888.384.8339, or 410-230-1200, during business hours.

That way, you’re sure not to miss my next recommendation. (You can also get set up with The Income Trader – A Covered Call Strategy through the Club’s website: www.oxfordclub.com.)

Right now you have a very real opportunity to put a very powerful trading system to work for you-one that’s prospered through the tough times and has every opportunity to thrive in the weeks and months ahead.

I urge you not to delay another moment.

Good investing,

Karim

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.

Return to Part 1 of Covered Call Options: A Low-Risk Way To Supercharge Your Cash-Account Returns by 200% – 600%

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View the complete Covered Call Options white paper in .PDF format