The Benefits Of Using Covered Calls

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• OPTIONS TRADING

The Benefits Of Using Covered Calls
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• Hi, My name is Steve and Im with Options Trading
  Research, today were reviewing our recently
  published article

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• The Benefits Of Using Covered Calls

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• Covered calls are an extremely popular yet often
  misunderstood options strategy. This strategy is
  widely used by retail and institutional traders
  alike.

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• However, I frequently feel the strategy is
  misrepresented, and sometimes poorly executed.
  You see, a covered call strategy seems simple in
  theory (and it certainly can be).

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• But, it is a far more nuanced type of trading
  than many people understand. If you really want
  to delve into it, covered call trading can be
  quite complex.

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• However, there are plenty of straightforward ways
  to implement covered calls, without getting too
  bogged down in the details. The key is to
  understand what the benefits are to using a
  covered call strategy.

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• Okay, so why use covered calls?

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• Heres the chart of JNJ

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• Is there a more consistent, stable stock than
  Johnson Johnson JNJ? Im not sure there is.
  Its been one of the most reliable stocks to own
  for the last quarter century.

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• JNJ has grown its dividend for at least 25
  straight years. And it continues to boast strong
  fundamentals year after year. There should be no
  surprise its a mainstay in many funds and
  portfolios.

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• Looking at JPM over the last year, its been
  mostly sideways trade. The stock also recovered
  pretty quickly after the correction in late
  August. Basically, its a nearly ideal covered
  call candidate.

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• You see, covered calls work best in a neutral or
  bullish environment for stocks. Looking at JNJ,
  its either been trading in a neutral or bullish
  pattern.

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• So what are the benefits to covered calls?

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• Just a quick reminder, a covered call trade is
  selling a call against a long stock position.
  The trade is maximized if the stock price is
  right at the short call strike upon expiration.
  For a refresher on covered calls basics, follow
  the link.

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• As great as JNJ has been for most portfolios over
  the years, it hasnt been a barn burner this
  year. In fact, if you bought the stock at the
  beginning of the year, youd only be flat on the
  year so far.

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• Thats worse than the overall market has
  performed in comparison. However, you could have
  easily outperformed the market if you were
  selling covered calls against your JNJ stock this
  year.

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• Heres whyDuring JNJs sideways period, from
  roughly February to August, the stock basically
  traded between 98 and 102.

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• Over that entire period, you could have sold
  covered calls at 102 or higher and collected the
  premium from those calls each and every month.

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• By collecting premium for the six month period,
  you probably would have added at least 5 returns
  (and perhaps quite a bit more) to your stagnant
  stock position. And thats just using the most
  basic covered call strategy.

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• Moreover, once the stock dropped during the
  August correction, you had additional
  opportunities to profit from covered calls.
  Knowing JNJ is a strong, resilient stock with a
  regular dividend, it wasnt hard to expect a
  rebound.

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• After the market volatility cooled somewhat, you
  could have sold covered calls against JNJ all the
  way back up. Its very possible you could have
  collected on the calls and the stock appreciation
  in that case. Its a win-win situation!

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• And, if you were holding covered calls during the
  correction, it would have at least offset your
  loss on the stock somewhat. While not ideal,
  its still a better overall result than someone
  who just owned the stock outright.

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• JNJ is perfect case study into the benefits of
  covered calls. Its easy to see how you can
  increase returns in your portfolio by using the
  strategy with

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• stocks youre already holding or even stocks
  you buy just for the purpose of selling calls
  against them.

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