It's one of the most frustrating things an investor can experience...
Thanks to some supposed global calamity in the making, the stock market enters a period of insane volatility. Each tiny bit of news is parsed by the financial media, and then the major indices swing wildly -- sometimes even in direct conflict with the "goodness" or "badness" of the news itself.
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After a few months of this -- and more than a few sleepless nights -- you check your computer screen to find the stocks in your portfolio are right back where they were before.
It's times like this that can lead an investor to ask:
"Is all of this worry even worth it?"
If you can identify with that feeling, then believe me when I tell you I understand. We've all been there.
But I'm also here to tell you that you didn't have to settle for this. In fact, those times of great market volatility are prime-time for one of the safest, most reliable ways around to earn extra income. And what's more, you don't even necessarily have to be "right" about the stocks you pick...
I can't believe more investors aren't using it. It's just crazy. There's just no better strategy for investors of all stripes in this current market environment -- and that goes double if you're looking for more income. (Who isn't?)
In fact, it's so simple once you understand the basics, you'll want to kick yourself for not using it sooner.
You're Probably Not Earning Enough...
See, many investors own stocks and simply hope that dividends and capital gains will be enough. The problem: hope isn't a strategy. And studies show that most individual investors underestimate how much money they'll actually need during retirement.
But covered calls can help get you there.
For those who are unfamiliar, covered calls let you make a deal with other traders who want to pay you cash upfront for the opportunity to buy a stock you already own at a higher price.
That money goes straight into your brokerage account. You collect the cash they pay to make the deal immediately (we like to think of this as a "bonus" dividend) -- and you still get the opportunity to sell your shares for a profit down the road.
Sounds pretty good, right? Of course, there are some things you need to understand about this strategy first, and I'll get to those in a moment.
But the nice thing about covered calls is you can use this strategy to generate income for day-to-day living costs... monthly bills... medical expenses... even have enough additional income for things you otherwise couldn't afford, like a lavish vacation.
However often you do it and however you use the income -- the power is in your hands. It's one of the most conservative ways around to generate extra income from the stocks you already own.
Just ask my colleague Amber Hestla, head of Profitable Trading's Maximum Income service. Amber and her premium readers use this entry-level options strategy to earn hundreds of dollars -- sometimes even thousands -- in extra income with each and every trade in her newsletter.
An Example Of A Covered Call Trade
A covered call strategy requires you to sell call options on a stock you just bought or already own (that's the "covered" part). When you sell call options, you can generate upfront income, also known as a premium, for every 100 shares you own.
Since you earn this income upfront, this offsets some of the downside risk in the stock -- the money you earn effectively reduces your cost basis. And because you own the shares, you still get to participate in some of the upside.
Let me give you an example of a covered call trade. (Keep in mind, this is not one of Amber's official recommendations -- I'm using this for illustrative purposes only.)
As I write this, shares of Phillips 66 (NYSE: PSX) are trading for about $111 ($111.66 to be exact). Let's say you recently bought 100 shares. You could sell a call option on Phillips 66 that expires on August 10 with a strike price of $116 for about $1.30.
This means if you execute this trade, you'll earn a premium of $130 ($1.30 x 100 shares). That's a return of about 1.1% ($130/$11,166).
That may not sound like much, but it's also close to half of PSX's current annual dividend yield. What's more, once this trade expires on August 10, which is 28 days from now. If you can repeat a similar trade again every 28 days, you'd earn income of 14.3% from your position. (Special bonus: PSX yields 2.8% right now, which you'd collect anyway.
Now, as long as the stock price stays below $116 on the date the options expire, you get to keep your shares.
Conversely, if the share price rises to $116 or above, you'll sell the shares, giving you a net profit of about 5.7% in 28 days. (The $1.30 premium you earned upfront lowers your cost basis to $109.70 ($111-$1.30). That's good for an annualized return of about 75%. Not bad...
How To Win With Covered Calls... Even When You're Wrong
Now here's where covered calls can really save your bacon. Let's say you recently bought 100 shares of Phillips 66 thinking the shares would rise. But something happens that you didn't anticipate (like an earnings miss) and the stock plunges by 5% (to $106.07).
If the stock stays at that level and trades for less than $116 on August 10, then you'll keep the $130 per contract and continue to own the stock. In this case, remember, you'll own PSX at a cost basis of $109.70 (Remember: you paid $111.66 per share, minus the $1.30 premium you received).
So what would have been a 5% loss is now only a 3.3% loss. Not bad either. That helps soften the blow a bit. And since you had enough faith in the company to buy shares in the first place, you should be able to sleep confidently at night knowing that either the stock price will rise or you can hold on and keep selling covered calls on the position to earn income (not to mention collect regular dividends -- which, in this case, PSX recently upped its last quarterly payment to $0.80), further reducing your cost basis, and minimizing losses until things turn around.
That's not to say covered calls are risk-free, of course. No investment is. But they can help you reduce risk, which is every bit as important as income and capital gains, if you ask me.
In this market, where safe income is tough to find, selling covered calls on high-quality stocks could be among the best -- and easiest -- strategies available. In fact, Amber has a special report detailing how she and her subscribers use this to earn hundreds -- even thousands -- in extra income per week. To check it out, go here.