dennis mccain
  • Home
  • Investing
    • Dividend Kings
    • Div Aristocrats
    • Div Champions
    • Business Dev Cos
    • Monthly Dividends
  • Options
    • Weekly Options

Investing

Ideas and Strategies on Investing.

Previous Articles

Covered Call Writing

8/28/2013

0 Comments

 
  "One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute"
-- William Feather, American Publisher and Author.

Picture
  I discovered option trading early in my trading career. I was fairly young and option trading was new and exciting. A lot of the traders at the time weren’t interested because they thought this was at the fringe of the trading profession and resembled gambling more than trading. In other words, it wasn’t a respectable way to make a living.

  To me it was intriguing and I wanted to understand how options worked. The more I found out about them the more fascinated I became. It seemed like I was creating money out of thin air (which of course I wasn’t). But it was also bewildering because options allow for so many different possibilities. Options represent both Hope and Protection combined with the security of Limited Risk for buyers. But for buyers options present such a low probability of success. For the seller of options it’s just the opposite. There’s no security and there’s virtually unlimited risk, but the probability of success is huge.

  So I asked around to try to determine who enters these kinds of transactions. And the answer I got for the most part was, “I don’t know. People who like to trade, I guess”. And as I delved further into the question, I discovered that at the time, and this was 30 years ago, most options being traded were covered call options and most of those were being traded in Florida.

  Today covered call options are generally referred to as a “buy-write” transaction. An investor buys the stock and then writes a call. To understand why these were occurring most often in Florida you have to understand what a covered call option is. A “Covered Call” is an options strategy where an investor who currently holds a long position in an asset (owns the stock) sells a call option at a certain (strike) price for a certain amount of time on that stock to generate income (a fee). If the stock remains at or below the strike price at the expiration date, the call seller keeps the income (fee) and can write another call. This allows the individual to continue to receive a steady stream of income as long as the stock is not called away. If the call is written well above the current price of the stock and the stock is called away, it’ll be called away at a profit and the seller also keeps the option income (fee). Nice, huh?

  Now back to why Florida. Well, Florida has a lot of old people. And old people are the ones that have a lot of investments. People that own a great amount of stock are by nature thrifty (as in cheap). They’ve accumulated this wealth and they don’t want to part with it unless they absolutely have to. But they want their investments to grow and they want to live off the dividends that are distributed. It’s just that sometimes dividends are just not enough for these greedy people. With covered call writing, the Florida elderly suddenly had another opportunity to make money off the stocks that they already own. And remember, selling options has a high probability of success.

  Having learned this, whether it was true or not, I was convinced that I needed to emulate these old rich people because that was my goal in life – to be rich when I got old. It’s still my ambition. I want to be rich when I get old someday.

  To this day I still buy stocks for wealth creation and dividends. And like the old people of Florida, I sell covered calls off my positions. It’s been a great way to increase my income above and beyond simply receiving dividends. And it’s the money I receive from dividends and derivatives that fuels my portfolio these days. 

0 Comments



Leave a Reply.

    Print Friendly Version of this pagePrint Get a PDF version of this webpagePDF

    Picture

    Author

    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


    RSS Feed


    Picture
    Top 100 Blogs for Dividend Investors

    Picture
    Follow Me on StockTwits!



    Dividend Growth Stocks
    Dividend Growth Investor


    Picture
    I'm on Seeking Alpha too!

    Archives

    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013


    ADDITIONAL RESOURCES:
    4 Month INDU Chart
    Dividend Ex-Dates
    Bidness Etc
    SharpCharts Voyeur
    StockCharts.com

    FINVIZ
    Seeking Alpha
    BDC Reporter
    Roadmap2Retire
    DivHut
    Dividend Growth Investor

    Dividend Yield

    Stock Market Mentor
    Chart Swing Trader
    Dividend Announcements
    IBD TV
    Stocks to Watch Today
    Dividend Detective

    DISCLAIMER
     I am not a licensed investment adviser, and I am not providing investment advise for you on this site. Please consult with an investment professional before you invest your money. Any opinion expressed here should not be treated as investment advice. I am not liable for any losses suffered by any party because of data or information published on this blog. Past performance is not a guarantee of future performance. Unless your investments are FDIC insured, they may decline in value.

    Picture
Powered by Create your own unique website with customizable templates.