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How does one "write covered calls against stocks the correct way"?
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 Rank: Copper
Joined: 12/23/2009 Posts: 7 Location: LA
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http://www.richdad.com/dallas/Look at the breakout session "How to “Rent Stocks” to Produce 3-6% Per Month Cash Flow Regardless of Market Direction" Is there any Rich Dad books that cover how to "write covered calls against stocks the correct way"? I can't attend the seminar because I have another seminar on the same day.
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Rank: Silver
Joined: 12/16/2007 Posts: 72
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The first thing is you have to make sure your broker lets you use options in your account. Covered calls are pretty simple you want to find a stock that is optionable with spreads no more than 30 cents wide between the bid and ask that is in an up trend or going sideways and make sure the market is doing the same unless it is a stock that your investing in and your willing to hold for a long period of time then the trend is not as important, you buy the stock and sell a call option against it. Example you buy ABC stock at 50$ you then sell the 55 call option against it for 1.50 your break even is 48.50(50-1.50=48.50) everytime you sell an option against your stock you lower your cost basis in the stock. If the stock stays below 55 at expiration you keep the 1.50 and you still have the stock so you can go sell the next months option against it, if the stock is above 55 at expiration you get called out meaning you lose the stock but you make 5$ off the stock and you still keep the 1.50 off of the option so total you make 6.50. What you don't want to happen is for the stock to drop because remember 48.50 is your break even anything below that you start losing money. Hope that helps you understand covered calls a little bit better.
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 Rank: Silver
Joined: 3/5/2010 Posts: 80 Location: USA
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I would add to this that I found a great book on covered calls by Ronald Groenke, "Show Me the Money, Covered Calls and Naked Puts for a Monthly Cash Income"
Groenke is a former computer programmer and he has developed a program that will let you sift through the stock universe and pick great stocks (meeting a strict criteria) that are ripe for high return covered call writes.
The process is simple and straightforward and I have been using it for a number of months realizing a good return on investment ... without the tenant complaints.
myhappyassets
Tenant complaints and clogged toilets got you down? Build additional passive CF assets
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Rank: Copper
Joined: 4/28/2010 Posts: 15 Location: Finland
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jschwartz wrote:The first thing is you have to make sure your broker lets you use options in your account. Covered calls are pretty simple you want to find a stock that is optionable with spreads no more than 30 cents wide between the bid and ask that is in an up trend or going sideways and make sure the market is doing the same unless it is a stock that your investing in and your willing to hold for a long period of time then the trend is not as important, you buy the stock and sell a call option against it. Example you buy ABC stock at 50$ you then sell the 55 call option against it for 1.50 your break even is 48.50(50-1.50=48.50) everytime you sell an option against your stock you lower your cost basis in the stock. If the stock stays below 55 at expiration you keep the 1.50 and you still have the stock so you can go sell the next months option against it, if the stock is above 55 at expiration you get called out meaning you lose the stock but you make 5$ off the stock and you still keep the 1.50 off of the option so total you make 6.50. What you don't want to happen is for the stock to drop because remember 48.50 is your break even anything below that you start losing money. Hope that helps you understand covered calls a little bit better. Excellent point, i just realized that my broker doesn't. Luckily I got out of the trade loosing only 5 USD. I realized something else, I probably need more money. 7000 USD is too little if I want some sort of diversification 4-7 trades, since one contract is for 100 underlying stocks? Is writing just one contract impossible?
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Rank: Silver
Joined: 12/16/2007 Posts: 72
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I realized something else, I probably need more money. 7000 USD is too little if I want some sort of diversification 4-7 trades, since one contract is for 100 underlying stocks? Is writing just one contract impossible?
You could look into doing diagonals, it's pretty much a covered call just doesn't require near as much money. No writing one contract is not impossible.
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 Rank: Copper
Joined: 4/27/2004 Posts: 1 Location: United Kingdom
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to manage risk effectively, it is recommended to limit each trade to no more than 2% of your capital, so for a 7K portfolio you are looking at $140 per trade. It may look small but that's a step towards controlling your emotions and learning to preserve your capital. If its proving difficult to find covered call trades i would suggest you look at other options strategies where you only trade options while you paper trade covered calls risk free.
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