Thursday, February 7, 2008
I love bear markets.
Bear markets create opportunities. Bear markets restore equilibrium and logic to stock prices. And the best part of all – bear markets cause option premiums to inflate faster than a rubber raft at a fourth-grader's pool party.
That's great news for folks who want to sell covered call options.
Selling covered calls is a strategy that creates income for investors who agree to sell shares of stock at a specified price by some future date. And selling calls creates a built-in insurance policy against downside risk.
For example, back in December, I told subscribers to Advanced Income – my covered call writing service – to buy shares of the S&P Homebuilders ETF (XHB) and sell the March 21 calls against the shares. The stock was trading at $19.73 at the time, and we sold the calls for $1.80. So basically, we got into the stock for $17.93 ($19.73 – $1.80).
We'll profit on the position as long as it stays above that level. Since the stock is currently trading for $20.79, I don't see much of a problem.
The best thing though, is that even if XHB falls below $17.93, we can sell additional calls against our shares and recoup any downside.
That's the beauty of covered call writing. You can buy a stock, create immediate income, protect your downside, and continue your income stream as long as you own the shares.
It's a fabulous strategy for dealing with bear markets. And it's a terrific strategy to use for generating income.
I started writing Advanced Income back in September. Since then, we've sold out two positions for gains of 7% and 8% in two months. We're sitting on four other positions (including the XHB trade) with current gains of 16%, 6%, 6%, and 4%. As we've been accumulating gains, the S&P 500 has lost 13%.
Like I said before, I love bear markets.
Selling covered calls on low-risk stocks is the single best strategy I know to profit when stocks are falling. Oh sure, you can buy puts and speculate on the downside – but there's risk involved in that (if you got caught short during the snap-back rally of the past two weeks, then you know what I'm talking about).
On the other hand, if you want to make 3% per month – every month – which is what we're currently doing with Advanced Income, then you need to sell covered calls.
Best regards and good trading,
Earn 15%-20% with This Safe Income Strategy
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