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Covered Calls Strategy
The Smart Profits Report: Issue #158
Monday, November 8, 2004
Covered Calls Strategy: The “Big Daddy” of Options
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
I have been invited to speak to my daughter’s fifth-grade class in a couple of weeks. As a professional options trader and speaker, you would think this would be a piece of cake. But I must admit: I am petrified.
What do I tell a group of 10-year-olds about options strategies and investing? Should I go ahead and get them up to speed on the latest covered calls strategy or tech straddle play I’m researching?
Should I make it a good-versus-evil speech about the evil options market makers trying to scalp every last penny from the good, unsuspecting investors? Or to go more in the Marvel direction, I could make it seem like a superhero adventure with Elliot Spitzer donning a cape and mask, swinging through the options pits zapping traders who cross the line…
In any event, I am sure I will be in a room with a doctor, a police office and a fireman. Hmm… Who do you think will be the most popular: the geek with a Wall Street Journal or the guy with a holstered Glock and a shiny star?
I think I will keep it simple and talk about money and why they should take money seriously.
Money Is Simple… Making Money Can Be More Complex
Most kids I have met are clueless when it comes to handling or understanding money. I think if you took away the “change” function on cash registers, most of the operators would not be able to calculate the change for you. Heck, some have a tough time even with the answer blinking in front of them.
I have vowed that my kids will learn about the power of investing and by the time they graduate from high school, they will have learned about compounding, saving, spending, credit, record keeping and the like.
(Then I think back to what I knew when I graduated from high school… Maybe I will be happy if they just understand that they can’t ask Daddy for money whenever they want to buy something!)
Money is not a complex issue. What’s complex is understanding how money works.
When I discuss options, for example - especially long-term options, or LEAPS - people’s eyes light up when they see how they can minimize their “money” risk by learning about a new way to invest. How is it possible that there is an instrument in the market that is actually ON YOUR SIDE?
Well, options ARE THAT instrument, and learning how to USE options, especially covered calls can be extremely rewarding to your portfolio.
How You Can Bat .700 With Your Stock Investments
I remember having dinner in Colorado with an experienced options trader from a big-name firm. He spent the whole evening ridiculing and trying to shoot holes in the system because he just did not get it. Finally, in a huff, he left the table.
The issue he had problems with was commissions. As a commissioned salesperson he could not see that online trading reduces transaction costs enough to provide my readers with a relatively safe and easy way to make 1% to 2% per month. What really bothered him, and what many people still don’t understand, is that making 1% to 2% a month on a regular basis IS a big deal… to me, anyway.
When I first employed my deep-in-the-money covered call strategy, I was nervous. Would it work as planned? Theory is always good, but practice is the real test.
Covered Calls Strategy - A Win Rate of 70%
Well, it worked, and six years later we are batting better than .700. (A good friend of mine who I trust, Dr. Steve Sjuggerud, recently wrote that most great traders have a win rate of about 33% - so 70% is truly remarkable.)
My personal portfolio is invested using this system to the tune of 60% to 70%. That is how much I believe in the system. I can remember the early days when most professionals, even other editors at my company, could not embrace the system because they could not believe how easily it worked. What was the trick? There is no trick. You just have to take some time to understand what an option is.
But back to more important matters… That speech to a room full of fifth-graders.
I would love to have some input from YOU about a topic that would be interesting for fifth-graders… One that involves money and investing.
Good Trading,
Karim Rahemtulla
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Today’s Smart Profits Cribsheet
- To learn more about my high-end trading service, The Income Trader: A Covered Call Strategy, click here.
- For more information on terms like “covered call” or “deep in the money” found in today’s article, check out our Smart Profits Glossary.
Related Articles:
- Basic Trading Rules: The Four Rules of All “Smart Money”
- LEAPS Option Strategies: A Gold Strategy That Beats Stocks, Bullion or Coins
- Defensive Covered Call Strategy: What’s Better Than Making Money? Keeping It.
