As promised last week, this is the start of a series on options strategies I’ve planned in order to show you a world of possibilities that the mainstream "press" quite simply doesn’t want you to pay attention to.
At the risk of sounding like a conspiracy theorist, I firmly believe that most investors are intentionally kept in the dark about anything that breaks away from the "buy stocks and mutual funds" mantra that makes Wall Street money.
Most mutual fund managers can’t see much further beyond Investing 101, and too many people in general are skeptical of options altogether. The problem is that they have no idea what they’re missing.
The options market was created for professionals, institutional money managers, and those who report to their wealthy, sophisticated constituents instead of the general public. But that doesn’t mean that the average Joe and Jane can’t use it too. They just need to get a few pieces of inside information first.
When George Soros took down the Bank of England to the tune of billions of pounds, he did it by using the leverage that options provided him. Basically, he saw a trend and figured out how to exploit it legally and with a surprisingly small amount of risk.
Sure, if it went against him, he would have lost out big time, but not nearly as much as someone who played the game the usual way. You see, the key to trading options is knowing how to use them to maximize the efficiency of your money. And the first and easiest strategy for doing that is the covered call trade…
Get "Free" Money
In order to execute a covered call trade you need to use both a stock and an option, hence the term "covered." It means that your trade is covered by the underlying shares that you own.
There is no risk to the broker when you execute it since there is protection of equity by the shares you already own even if it goes against you. And that’s the reason why covered calls can be used by anyone in any type of account, including your retirement account.
When you enter into a conventional covered call trade, you’re essentially pledging to sell your shares at a certain price - known as the strike price - on a certain date, commonly referred to as expiration.
For pledging your shares, a buyer pays you an amount of money called a premium. And it doesn’t matter what the final outcome is; you still get to keep that premium regardless of who ends up with the shares in the end.
Since it’s yours to keep, spend or reinvest, you reduce the basis of your stock.
