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One great investment strategy is called writing covered call. This strategy can be extremely profitable if done correctly.

In case you are woundering what this strategy is exactly I’ll explain? When an investor sells a call on their stock what they are doing is selling another investor the right to buy the stock from them at a given price at some point in the future. For example if you own stock XYZ and it is trading at $53 you may decide to sell the front month $55 call for $4.

You would get $4 in option premium once you enter the trade but you would also be obligated to sell your stock at $55 if you get called out. Well obviously no one is going to make you sell a $53 stock at $55, so it is pretty likely that the trade is going to be profitable.

But if the stock goes above $55 it is a little different. If a stock breaks $55 then chances are you will get called out of your investment and forced to sell your stock.

There is some risk to placing a covered call trade. If the stock shoots up to say $80 in a month then you would have missed an extremely profitable move in the stock. Huge moves like that can actually happen in the market, so the risk of missing a profit is real.

Even so selling covered calls can still help investors increase their returns in the long term. If the stock stays flat, goes down, or even comes up a little the call will expire worthless and you would walk away with the profits.

The consistency you can recieve by selling calls month after month can be worth the risk. While it can be risky it can also be a great strategy, this is especially true when you combine it with fundamentally strong great dividend paying stocks.

Tags: covered calls, Writing Covered Calls

This entry was posted on Thursday, February 25th, 2010 at 11:02 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.