The real beauty of the covered calls strategy is making money on a stock, even when the price of the stock doesn’t move. Yes, it’s nice to make the extra income for a covered calls position when the underlying stock increases in price and the position is rolled, but what really adds oomph to the covered calls strategy is the positions that make money when a stock goes nowhere or even drops slightly in price.
For example, the PowerOptionsApplied Titanium advisory newsletter entered a covered calls position for Principal Financial Group (PFG) on 8/31/2009. The position entered is shown below:
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| Covered Call Position for Principal Financial Group Entered on 8/31/2009 | ||
|---|---|---|
| Buy To Open Stock | Sell To Open Call | |
| PFG | POXIB (SEP 28) | |
| Price | $28.19 | $1.45 |
The position had a potential return of 4.7% if the price of PFG was greater or equal to the strike price of the call options ($28.00) at expiration. Best of all this return would be realized in only 19 days!
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At expiration on 9/18/2009, the price of PFG was $28.29, or a profit of only $0.10 for a long position in PFG. The $0.10 profit represented a “whopping” return of 0.4%. The 0.4% return is certainly not enough to retire on.
However, the covered calls position for PFG returned the full 4.7% and in only 19 days. The 4.7% return of the PFG covered calls position even beat the S&P 500 ETF’s (SPY) return of 4.2% over the same time period.
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| Comparison of Covered Call vs. Long Positions | ||
|---|---|---|
| PFG Covered Call | Long PFG | Long SPY |
| 4.7% | 0.4% | 4.3% |
But, a long position in SPY would not have had the safety cushion as the covered calls position for PFG. The covered calls position for PFG had downside protection of 5.8%. So as long as the price of PFG did not drop more than 5.8%, the covered calls position for PFG would be profitable.
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| Comparison of Downside Protection of Covered Call vs. Long Positions | ||
|---|---|---|
| PFG Covered Call | Long PFG | Long SPY |
| 5.8% | 0% | 0% |
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’ 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] income, stock, downside protection, PFG, Principal Financial Group Inc., SPY, S&P Depositary Receipts Trust ETF [/tags]