Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

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Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Free course

Covered Call

July 18, 2017 August 21, 2020

Covered Calls are one of the smartest investment strategies available in today’s stock market.

Managing the balance between Risk and Reward is the biggest challenge faced by every trader and investor. The Covered Call strategy, or Buy Write, is one of the key strategies professionals use to Manage Risk. And the Australian and US markets provide us with one of the most dynamic environments that are ideally suited for the Covered Call Strategy. We call this strategy a Passive Income strategy and one that, ideally, every investor should be fully aware of.

Covered Call Strategy

None of us want to lose money in the markets, while we expect every trade we make to produce exceptional returns. One of the key strategies in managing the balance between Risk and Reward is the Covered Call Strategy, also known as the Buy Write Strategy.

It is considered to be a Lower Risk Strategy that provides some downside Risk Management and protection, while at the same time provides a Premium, Up-front Income or as we like to refer to it, Cashflow On Demand.

The Covered Call Strategy is one that just about anyone can implement! With an easily understood approach, this strategy has become one of the most popular strategies for many Mum and Dad Investors and Self Managed Superannuation Funds. But to date, the focus for many Australian investors has been just on the Australian market, traded on the ASX. These days, however, trading the Covered Call Strategy on the US markets is actually just as straightforward and can offer a significantly broader range of opportunities.

  • Generating More Consistent Returns
  • What is the Covered Call Strategy CTA INTO WEBINAR
  • The Outperformance of the Covered Call Strategy
  • Getting Paid While you Sleep is “Passive Income”!
  • 10 Commandments of the Covered Call Strategy (DOWNLOAD THIS CHEAT SHEET RIGHT NOW)
  • Which is the best market for the Covered Call Strategy – Australia or the US?
  • What type of investor does the Covered Call Strategy best suit?
  • Where to become and expert!

Generating More Consistent Returns with the Covered Call Strategy

Having been involved in the markets as a professional trader for more than 25 years, I’ve had the opportunity to manage funds and trade on almost everything, from stocks, options, CFD’s, Exchange Traded Funds (ETFs), Futures and Foreign Exchange. Throughout that time, I have also owned a brokerage firm and one huge observation that provided me was a very clear insight into who makes money and who doesn’t.

I have observed that the average “Mum & Dad” investor is typically looking for the quick gains to make them rich, starting with small amounts of capital and were fearful of losing anything to the markets.

Everyone is entitled to their dream, but frankly, this mindset and approach very rarely works. Instead of chasing the “one big one that will triple in value overnight” and trying to hit the ball out of the park, a more reliable approach, which actually does work, is to instead, hit a lot of singles!

And this is the true uniqueness of the Covered Call Strategy. When used correctly, it offers great consistency in returns, which is without question, the real key for creating wealth. Not only does it have the ability to provide immediate and upfront income into your account, it also provides the potential for a lot more wins than losses – the reasons why, we will explore later in this article.

Lots more wins than losses provide a very big boost to confidence, and that is critical when it comes to any trading and investing success.

What is the Covered Call Strategy

Investing using Covered Calls or Buy/Writes is a fairly straightforward two-step strategy that pays the investor an immediate and upfront income, as well as the potential for very healthy returns over time.

The covered call strategy stops you from having to guess whether the market is going to go up or down and instead helps you make a profit if it goes up, goes sideways or even goes down a little bit. And this is a huge advantage.

Almost all investments are made up of two things. An Asset and then the Income from that Asset. Cash at the bank is an asset and interest earned is the income. A Property is an asset and the monthly rent is the income. With the stock market, Stocks or Shares are the asset and Dividends are the income.

Each has its advantages and disadvantages. Cash at the bank currently earns a paltry return and after tax and inflation, is actually a negative real return, but considered practically risk free.

Property involves a larger amount of upfront cash, requires the ability to get finance, high transaction fees, maintenance, but does offer the ability for both income and capital gain, when held for the long term.

Shareholders that invest for dividends have the potential for both capital gain and income, as well as some favourable tax treatment too. However, from a cashflow point of view, income twice a year is not that exciting.

So how can you have the opportunity to do better – that is more income, more regularly and not need to tie your money up for long periods of time? Imagine the opportunity for a potential income of 1 to 3% in a month, and sometimes more, rather than those same percentages, per year!

One misbelief that is widely held, is that to generate a better return, the investor will need to take on more risk. This is simply not true – stay with me here – it is all about using better strategy!!

This is where the Covered Call Strategy stands out from the crowd. It offers the ability to generate immediate and upfront income. This can be Monthly or Weekly, depending on the investor’s goals and objectives. The strategy offers huge flexibility – it can even work in a falling market! And you don’t need a ton of money to start.

So step one, you need an asset and in this case shares. Typically the trading we do is concentrated on the bigger blue-chip shares – BHP, CBA, Woolworths, Macquarie Bank, Disney, Apple, Goldman Sachs, Starbucks, and so on. And these shares are bought in “packets” of 100. So when you are starting out, cheaper shares can let you start with a much smaller amount of money.

After buying the shares, we then sell a Call Option over the shares – giving you an immediate and upfront income, through the call premium you receive. Once you understand options, you have a massive strategic advantage in the stock market for tipping the odds in your favour. Think of it this way, most investors in the stock market are playing Draughts and investing in 2D – in other words, the only way they make money is if they guess the right stock and it goes up. You are going to be playing Chess and investing in 3D – huge difference. You will enjoy the opportunity for making money whether the market goes up, sideways, or even down a little.

Covered Calls give you more control over your outcome than virtually any strategy in the stock market. You choose your stock, your income level, how long you are likely to be in the trade for, and even your downside risks. So for those reading that like the idea of more control, this will appeal to you!

BTW if you want to learn more about how to do this, check out this educational webinar right now, CLICK HERE. It will be a lot easier to understand than simply reading about how it works.

The Outperformance of the Covered Call Strategy

Previously, we mentioned the potential for 1 to say 3% income for a month and this is certainly possible, in fact, sometimes there is the potential for more than that. However, before you go order your new Mercedes SLS, bare in mind you wont be doing that every month. Market conditions change and there may be times when you sit out on the sidelines. That said, not only does this strategy work, it is also arguably a lower risk strategy than simply owning shares outright!

So how does the strategy perform over time?

In a word, GREAT. Rather than take an isolated period of time, lets look back over big chunk of time.

The chart below is a comparison of the Covered Call and Buy Write Strategy, compared to the ASX200, the benchmark index for the Australian Stock Market.

ASX Buy Write Index (Green) vs ASX200 (Blue)

SOURCE: www.ASX.com.au
Client notice: All trading and investing involves risk and past performance is no guarantee or reliable indicator of future performance.

As you can see, the green line – our strategy, has significantly outperformed over that time frame. Even more interesting is that during the tougher times in the stock market, such as the GFC, the Covered Call Strategy continued to outperform, and this is critical.

Enough said, I guess, it just works for those that use it!

Getting Paid While you Sleep is “Passive Income” and this hooked me nearly 25 years ago!

This is an interesting headline and the sort of thing that many people view as being passive income. However, on considering this a little more, there are only a few investments that work this way and the Covered Call Strategy is one of them.

In fact, for those of you that are time poor, or have other interests that rank way higher than the stock market, then the Covered Call Strategy will very likely appeal to you! Reality is, investing more time doesn’t make you more money in fact, it is more likely the reverse!

With the stock market back at record highs, many “spruikers” are back out there, promoting all sorts of systems for picking the next rising star. However, such systems rely on one critical and over looked fact. You must get the direction right if you wish to get paid!

Sounds simple but effectively this is a 50/50 bet at best. Would you put your investments on the table and play Red or Black? I really hope that is not the case for you! So rather than introduce a variable with 50/50 odds, where can we find a higher probability of success?

The old expression ”as sure as day follows night” is really the answer – one thing we can guarantee with 100% total certainty is that Time does pass by.

Now because Time passes by, we have opportunity – one that is guaranteed and probably worth you taking a closer look.

How about earning money while you sleep – being paid for time passing, rather than being paid for your time?

This is not a concept, it is a hard fact yet very few investors even know about this. Actually its probably one of the most compelling reasons for looking at trading options, the one that got me hooked on the Covered Call Strategy 25 years ago, and that is being paid for time to pass by.

When you sell a call option over the packet of shares you own, to generate you immediate and upfront income, the amount of money you receive for selling the option relates to time – how long the option has to run. This value gets smaller as each day passes by until the option expires.

Putting this another way, with the Covered Call Strategy, money is being paid to you, upfront and immediately in return for time passing by and that is a “no brainer any day of the week”!

Which is the better market for the Covered Calls Strategy, Australia or the US?

This question is one that I get asked more than any other, by new traders looking to get successfully started trading the Covered Calls Strategy and is very easy to answer.

I simply don’t care which market and have taken literally thousands of covered call trades on both the US and Australian markets with an equal lack of preference, whether that is on my own personal account, or within the Hedge Fund that I own and manage! Yet there are a number of mistruths out there, promoted by the ill-informed that have a product or agenda to push.

FACT: There is no difference in premium or income possibility between the Australian and the US market one is not better than the other on that basis.

Options Prices are mathematically calculated based on a number of factors, but particularly volatility, time and how the Strike price of the option relates to the current stock price.

FACT: The US market is cheaper to transact than the Australian Market. Like most things (Cars, Fuel, iTunes, Food, Alcohol, Electrical Goods) Australia is typically more expensive than the US. As a result trading the US if you are a more frequent trader can offer some distinct advantages when it comes to paying far less brokerage fees to transact.

FACT: Trading the US market will expose you to currency risks and fluctuations. If you buy a stock in the US and its share price stays flat, but the Australian Dollar appreciates against the US Dollar, you will be sitting on a loss on the position due to the exchange rate move. Of course, the reverse can also happen, giving you a boost to returns.

FACT: There are far more stocks that you can apply the Covered Call Strategy in the US market. The market is also more liquid (has more buyers and sellers) providing several hundred thousand individual covered call opportunities every day – and that could be far too many choices for some people!!

FACT: The US market trades in a different time zone that may require you to be up late at night or early in the morning to place trades and yes, you can place trades outside of market hours, but this can be quite dangerous. Compared to the Australian market, which trades between 10am and 4pm each day.

FACT: If you are here in Australia, you are likely to be much more familiar with the stocks you are using the Covered Call Strategy on, and what factors are influencing their share price and outlook, giving you a far higher probability of making money from the trade.

FACT: Both markets are great to trade and both have advantages and disadvantages, so make sure you choose the opportunity that works best for you.

What type of investor does the Covered Call Strategy best suit?

Narrowing down the type of investor that the covered call strategy ideally suits, raises several of the key issues of the strategy.

In fact its probably best to start by identifying who it doesn’t suit and that is someone that is looking for a “get rich quick scheme”. Covered Calls are not get rich quick, instead, they are a key investment for the investor that is looking to create long term wealth!

And success requires discipline, some patience and effort, however, the results can be exponential.

The strategy requires only a few minutes time for maintenance and management once you have been properly trained

The strategy provides regular income – monthly or even weekly

The strategy can be used in a falling market (yes with a couple of tweaks the strategy is just as effective in bear or falling market conditions) and yes I have done this.

The strategy is relatively low risk, particularly when compared to other stock market strategies.

The strategy can be geared up, if you want to use leverage, once you have gained confidence and built the process.

The strategy offers huge flexibility to suit your risk appetite, enabling more aggressive returns for those with a higher comfort level with risk.

The strategy is very well suited to retirees who are looking for regular income or those looking to build up their retirement funds.

The strategy can be combined with full professional risk management, including the potential for capital protection.

Where to become an expert

Think about it this way, who wants to be average? Being average gives a mediocre result, boring grey, not a clear and clean defined black or white. So my suggestion to you is if you want to be and average investor, go for it, its really easy, just do what everyone else is doing and get what everyone else is getting, which is most likely, frustrated!

However, if you want to have the odds, dare I say, almost unfairly stacked in your favour, when it comes to making money from the Covered Call Strategy, enjoy great consistency and avoid the typical pitfalls that crush most investors before they even start,

Not to mention live with the benefits of professional risk management, giving you the critically important peace of mind we all crave, well just maybe we can explore the possibility of me helping you become an expert.

After all, in life, it is the professionals that get paid, and amateurs don’t. Find out how we can help you by clicking here.