Can you profit from a falling market with a Covered Call?

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Covered calls have always been associated with being the go to strategy for a rising and sideways market.  As we may have entered into a consolidation phase, and a pull back in Europe, the issue of what next becomes a critical question for all traders and investors.

Covered Call Profit Falling Market

Can you profit from a falling market with a Covered Call?

Good question!! Traditionally this is a nightmare for the covered call trader – as the investor sees the value of the underlying asset they hold, fall.  So how can this strategy be successfully applied in a profitable way, against a falling market?

The emergence of the Cyprus issues – its debt levels and the ECB’s response, have not only unsettled markets, but also prompted a return of focus onto Europe’s debt woes.  As such, some shorter term weakness is expected across Europe’s equity markets.

So what covered call could you invest in, to profit from this opportunity?

How about buying into a long position in the EPV Pro-shares Ultrashort MSCI Europe ETF, because that is exactly what we did!

EPV is an exchange traded fund, listed on the US market, which is geared to provide 2 times the inverse of the European equity market – in otherwords, if say Europe fell by 3%, EPV is designed to increase by 6%.

Our goal was to buy EPV and sell call options over it, enabling our clients to generate immediate cashflow, and in addition, some capital gain from a fall in the European equity markets. This is a clear example of the benefits from our approach to using both the Australian and US markets to assist our clients in generating solid cashflow, across a variety of trading conditions.

The details of the trade were as follows (20th March 2013)

Stock price at entry $24.48
Option April $25.00 Call option
Premium/Income 70c
Break Even $23.78
Premium Yield 2.8%
Exercise Yield 4.9%
Exit Stop $22.59
Current stock price $24.64

 

So there you have it – generating cashflow and gain in a falling market!  This is just one example of using the covered call strategy to continue generating cashflow and capital gain, from a market that is falling.  If you would like to receive our trade recommendations, just like EPV, register to our Covered Call Training Here

Originally from the UK, Andrew has been a market professional for almost 19 years, trading a wide range of global markets and instruments. As a highly regarded industry speaker, he has spoken alongside Sir Richard Branson, Robert Kiyosaki, Anthony Robbins and Tony Blair, empowering many thousands of people, from all over the world, with the skills, techniques and ...
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