Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Best Strategy for Dealing With the Stock Market Sell-Off

Stock-Markets / Stock Markets 2014 Oct 15, 2014 - 05:20 PM GMT

By: Investment_U

Stock-Markets

Marc Lichtenfeld writes:Investors have it tough today.

The market has been ugly the past few weeks, instilling fear in some investors that the bull market is over and they missed their chance at making money.

Additionally, interest rates are still so low, it's tough to generate any income from your nest egg.


However, the recent market slide is a perfect opportunity for investors who know how to pick up extra cash with a conservative strategy.

This method can easily generate a year or more worth of dividend income in just four to eight weeks. And the recent market volatility means we can actually make more today than we could have a few weeks ago on the same trades.

Let me repeat that because it's important.

The market sell-off means we can now generate more income than we could have just a few short weeks ago.

The strategy is selling covered calls.

Fear Not

Now, before you run away screaming because you've heard options are scary or complicated, understand that selling covered calls is more conservative than owning a stock outright. And it takes only one more simple step than simply owning a stock.

I'll walk you through the process right now.

Let's say you want to own shares of a blue chip dividend payer like <strong>Merck</strong> (NYSE: MRK). As I write this, to buy 100 shares, it would cost you $5,740. Shareholders receive an annual dividend of $1.76, or $0.44 per quarter. That comes out to a 3.1% annual yield. Not bad in today's low interest rate environment.

It's not bad, but 3.1% isn't a whole lot of income either. So an investor who wants to generate more income from his Merck shares can sell a covered call on the stock.

It's considered covered because the investor owns the stock already. If the investor sold the call without owning the stock, that would be a naked call. That's risky. Covered calls are not. I'll explain why in a moment.

The investor could sell a Merck December $60 call for $1.15. That means that he will collect $1.15 per share for 100 shares. Options are traded in 100-share blocks. So on 100 shares, the investor collects $115 cash immediately after selling the call.

Remember, we're <em>selling</em> calls, not buying them. The buyer of the call has the right, but not the obligation, to buy the Merck stock from the investor at $60. If at options expiration, which is typically the third Friday of the month, the stock is below $60, the call will expire worthless and the investor keeps the $115.

If the stock is above $60, the buyer will likely exercise the call, meaning he will buy the stock for $60. In that case, the investor must sell the stock for $60, no matter where it's trading. But because he bought it at $57.40, he'll still make a $2.60 per share profit or $260.

Additionally, he keeps the $115 he received for selling the call. And he also gets the $0.44 dividend if he owns the stock on the ex-dividend date.

So on a stock that yields 3.1% per year, the investor who sells a covered call earned 7.3% in two months. He earned more than twice the income in one-sixth the amount of time.

Even if the stock price falls below where the investor bought it, he still collects the $0.44 per share dividend like normal and keeps the $115 option premium he received for selling the call.

Because of that $115 or $1.15 per share, the breakeven point is now $56.25 instead of the original price of $57.40. The option acts as a buffer against falling prices and is the reason covered calls are more conservative than owning a stock outright. When things go bad, you lose less.

Be the House

When you go to a casino, you know you may get lucky, but the house usually wins. When you sell a covered call, you are the house. You're selling a call to speculators who are betting on the stock price going up. More than 80% of options expire worthless, which is fine with us because we sold it already; we didn't buy the call and own it. We own only the stock.

Right now is a great time to sell covered calls because market volatility has increased significantly. There are several components that go into how options are priced. I won't bore you with the details here (if you want more information, click here, but when markets get more volatile, option prices get more expensive.

So with the current market environment rather volatile, those options have become more expensive, which is good news for option sellers. They get more money for the options they're selling than they would have a few weeks ago.

You can see that selling covered calls makes a lot of sense in the current market - especially with all of this volatility. Low interest rates and yields combined with higher volatility means that covered call sellers can make more money with less risk than they could by just owning a stock.

Good investing,

Marc

Source: http://www.investmentu.com/article/detail/40430/covered-calls-best-strategy-for-dealing-with-market-sell-off#.VD7IY010y0k

http://www.investmentu.com

Copyright © 1999 - 2014 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in