One of the ways I squeeze extra income out of my stock holdings is to sell covered calls on my stocks. The challenge is always trying to locate and calculate the call premiums and returns on selling calls out into the future. If you don’t know what I’m talking about, visit this link on my resources page to get an introduction.
OptionsStrat.com
The website is http://www.optionstrat.com but you can jump to the covered call page here.
In the image below, I picked IWM which is an ETF for the Russell 2000. This ETF is generally volatile which is great for selling calls and buying them back cheaper or letting them get assigned or expired.
On Friday IWM closed at $208.99. If you were an enterprising trader you may be tempted to execute a Buy-Write transaction and buy 100 shares of IWM at $208.99 ($20,899) and sell the December 20 $209 strikes for $1,400 (6.7% return in 4 months or about 20% annualized).
Of course there is no “free” lunch. The risk with high premium calls on equities also means the equity can move violently in either up/down direction. The chart below from Yahoo Finance show how IWM has moved over the past 3 months.
The general rule for doing covered calls or cash secured puts is to never execute on an equity that you are not willing to own for the next 10 years.
Between dividends, sold calls and capital appreciation, it’s possible to juice returns during volatile market times like we appeared to have entered this past few months. This strategy also forces you to stay up to date with your investment holdings and learn to develop strategies around risk mitigation for your portfolio.
Share The Wealth
What website/tools do you use for options trading? Let me know in the comments below.