Investors in stocks naturally like it when stocks are on the upswing, but don’t like it when stocks are sliding downward.
One way to cushion the downside is with an in-the-money covered call investing strategy. Generally, investors consider covered calls as limited return on the upside with a lot of exposure to the downside. However, in-the-money covered calls can provide monthly income while also providing downside protection.
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A covered call investing position is entered by selling a call option against an already existing stock or against a stock purchased specifically for entering the covered call investing position. A profit and loss graph for an in-the-money covered call looks like this:
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As you can see from the profit/loss graph, for an in-the-money covered call, the price of the stock can drop all the way to the strike price of the call option and the position will remain fully profitable.
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An example will be presented in order to more clearly illustrate the in-the-money covered call investing concept.
PowerOptionsApplied‘s Palladium newsletter published an in-the-money covered call for the iShares DJ US Real Estate ETF (IYR) on 1/21/2009. The price of IYR was $30.64 at the time of entering the position and the call option (BJNBY) was sold for $6.5 and had an expiration month of February with a strike price of $25. The maximum potential return of the position was 3.6%.
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At options expiration on 2/20/2009, the price of IYR closed at $27.35. An investor simply purchasing IYR for $30.64 on 1/21/2009 would have lost -10.7% on 2/20/2009. However, the in-the-money covered call was fully profitable and returned 3.6%.
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| Return of In-The-Money Covered Call for IYR | Return of Buy-and-Hold for IYR |
| 3.6% | -10.7% |
For investors looking to protect their downsides and also generate monthly income, an in-the-money covered call investing strategy may be just what the doctor ordered.
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions’ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
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PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.
PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.
[tags] Palladium, newsletter, IYR, iShares DJ US Real Estate ETF [/tags]