Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

The Best Strategy for Dealing With the Stock Market Sell-Off

Stock-Markets / Stock Markets 2014 Oct 15, 2014 - 05:20 PM GMT

By: Investment_U

Stock-Markets

Marc Lichtenfeld writes:Investors have it tough today.

The market has been ugly the past few weeks, instilling fear in some investors that the bull market is over and they missed their chance at making money.

Additionally, interest rates are still so low, it's tough to generate any income from your nest egg.


However, the recent market slide is a perfect opportunity for investors who know how to pick up extra cash with a conservative strategy.

This method can easily generate a year or more worth of dividend income in just four to eight weeks. And the recent market volatility means we can actually make more today than we could have a few weeks ago on the same trades.

Let me repeat that because it's important.

The market sell-off means we can now generate more income than we could have just a few short weeks ago.

The strategy is selling covered calls.

Fear Not

Now, before you run away screaming because you've heard options are scary or complicated, understand that selling covered calls is more conservative than owning a stock outright. And it takes only one more simple step than simply owning a stock.

I'll walk you through the process right now.

Let's say you want to own shares of a blue chip dividend payer like <strong>Merck</strong> (NYSE: MRK). As I write this, to buy 100 shares, it would cost you $5,740. Shareholders receive an annual dividend of $1.76, or $0.44 per quarter. That comes out to a 3.1% annual yield. Not bad in today's low interest rate environment.

It's not bad, but 3.1% isn't a whole lot of income either. So an investor who wants to generate more income from his Merck shares can sell a covered call on the stock.

It's considered covered because the investor owns the stock already. If the investor sold the call without owning the stock, that would be a naked call. That's risky. Covered calls are not. I'll explain why in a moment.

The investor could sell a Merck December $60 call for $1.15. That means that he will collect $1.15 per share for 100 shares. Options are traded in 100-share blocks. So on 100 shares, the investor collects $115 cash immediately after selling the call.

Remember, we're <em>selling</em> calls, not buying them. The buyer of the call has the right, but not the obligation, to buy the Merck stock from the investor at $60. If at options expiration, which is typically the third Friday of the month, the stock is below $60, the call will expire worthless and the investor keeps the $115.

If the stock is above $60, the buyer will likely exercise the call, meaning he will buy the stock for $60. In that case, the investor must sell the stock for $60, no matter where it's trading. But because he bought it at $57.40, he'll still make a $2.60 per share profit or $260.

Additionally, he keeps the $115 he received for selling the call. And he also gets the $0.44 dividend if he owns the stock on the ex-dividend date.

So on a stock that yields 3.1% per year, the investor who sells a covered call earned 7.3% in two months. He earned more than twice the income in one-sixth the amount of time.

Even if the stock price falls below where the investor bought it, he still collects the $0.44 per share dividend like normal and keeps the $115 option premium he received for selling the call.

Because of that $115 or $1.15 per share, the breakeven point is now $56.25 instead of the original price of $57.40. The option acts as a buffer against falling prices and is the reason covered calls are more conservative than owning a stock outright. When things go bad, you lose less.

Be the House

When you go to a casino, you know you may get lucky, but the house usually wins. When you sell a covered call, you are the house. You're selling a call to speculators who are betting on the stock price going up. More than 80% of options expire worthless, which is fine with us because we sold it already; we didn't buy the call and own it. We own only the stock.

Right now is a great time to sell covered calls because market volatility has increased significantly. There are several components that go into how options are priced. I won't bore you with the details here (if you want more information, click here, but when markets get more volatile, option prices get more expensive.

So with the current market environment rather volatile, those options have become more expensive, which is good news for option sellers. They get more money for the options they're selling than they would have a few weeks ago.

You can see that selling covered calls makes a lot of sense in the current market - especially with all of this volatility. Low interest rates and yields combined with higher volatility means that covered call sellers can make more money with less risk than they could by just owning a stock.

Good investing,

Marc

Source: http://www.investmentu.com/article/detail/40430/covered-calls-best-strategy-for-dealing-with-market-sell-off#.VD7IY010y0k

http://www.investmentu.com

Copyright © 1999 - 2014 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules