are profitable, but many are, and they can be an excellent income source. Taxes and brokerage commissions are excluded from the calculations in this post. Remember that a core principle at Retire Certain is to decide how much time you want to spend on your income streams first, and then implement income generating and wealth building strategies from your lifestyle decision so you can live how you want. While there is less potential profit with this approach compared to the example of a traditional out-of-the-money call write given above, an in-the-money call write does offer a near delta neutral, pure time premium collection approach due to the high delta value on the in-the-money call option (very close to 100). At the time these prices were taken, RMBS was one of the best available stocks to write calls against, based on a screen for covered calls done after the close of trading. Below are the other factors for when to use an in the money covered call strategy, so keep reading. This is because the entire position can be entered into based on the optimal income initially. If used with margin to open a position of this type, returns have the potential to be much higher, but of course with additional risk. you may have an insight into an upcoming event. This isn’t to say that this same return on investment could be made if this investment were made repeatedly throughout the year. Alex bought 600 shares of Retire Corp for $18.50 a share on May 16. And who doesn’t want higher income for the same amount of capital at risk? Remember, the further away the strike price is above the current stock price, the less income generated since the option premium (price) gets lower as it moves further up and away from the stock price. Note that if you’re new to stock charts, while technical analysis can seem daunting, very basic technical analysis can be an incredibly valuable tool for evaluating the best covered call strategies. income while reducing or eliminating capital gains. As the striking price is lower than the price paid for the underlying stock, any upward price movement will not benefit the call writer since he has agreed to sell the shares to the option holder at the lower striking price. The deeper in the money the strike price is to the market price of the underlying security, the higher the premium from a covered call strategy. ♦Wealth Building Mindset♦ Always evaluate potential best and worst case investment outcomes, then accept and learn from what occurs. Read my related post Problems with Covered Calls. As you can see in Figure 1, the most attractive feature of the writing approach is the downside protection of 38% (for the May 25 write). And since the market is declining, it is harder to sell call options near your stock purchase price since the option prices have declined with the stock price. The six-month (December) deep-in-the-money 1050 call is now trading for $131, meaning you can initiate the long side of the trade for $13,100 instead of $115,500. * ABC Jan 45 calls trading at $18.50 (These are in the money by three strike prices.) And this happens immediately after the call option is sold against the stock. Read my related post Does Living Off Covered Calls Really Work? This would be offset by a loss on the stock of $300 ($.50 per share assuming she sold it at $18 on Monday morning following option expiration) leaving her with a profit of $500. Make Money By Spending Less. A zero cost collar is an options strategy used to lock in a gain by buying an out-of-the-money (OTM) put and selling a same-priced OTM call. Option 2. That’s not to imply covered call strategies are bad. If you write/sell deep in-the-money calls on stocks you have owned for more than one year, a long-term gain turns into a higher taxed short-term gain. The reality is that all covered call strategies are subject to overall stock market risk, as well as stock specific risk. One of the practical applications of selling cash-secured puts is to buy shares “at a discount” In my books and DVDs I use out-of-the-money puts in lieu of setting limit orders in order to accomplish this goal. Selling Deep In The Money Calls Example Let's say you like McMoRan Exploration (MMR, oil & gas company). . With this in mind, she decides to sell a call option with a $99 strike for $2 instead of a call option with a $100 strike for $1.50 agsint her Income Streams, Inc. shares. This exact discovery led us to create diversified multiple income streams over the past 15 years from real estate, stocks, and online business. Again, it’s important to first note that investors who own stocks without covered calls, especially stocks that don’t pay dividends, also suffer during bear markets. Assume Retire Corp closed at $19.00, or out of the money. Sell a Call Option After Stock Rises. Likewise, new covered call trades each month tend to generate more income, easier. Buying options is a lot like gambling at the casino. This lower basis (adjusted stock price) can also serve as a good place for a stop loss to lower investment risk from stocks. You’ll want to decide if you prefer that your covered calls get exercised or not. market price when she sold an in the money call option for $1.40 with an $18 strike. Risk is permanently reduced by the amount of premium received. – Buying an in the money LEAPS call – Selling an out of the money call with a near-term expiration date. or out of the money covered call strategy. That's over three times what highly rated bonds pay. 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