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Saturday, October 2, 2010

Covered Calls as Insurance (Wall Street)

I've only been trading a year, so there's SO much for me to learn. I want to share what I find exciting here for those who might be in my shoes.

Got really excited about the "new" use of covered calls I learned from the DVD of Darlene Nelson Powell's "Trading the Q's." When an option isn't going the way you expected, you simply SELL a covered call (same month, one strike price above (for a call) or below (for a put) and it works like insurance. As the stock goes 'down' (on a long call) the short call goes up. Yesterday, I made $244 doing this, and bought back the short just as the trend turned and started going up. So I can then make money on the long call as well. It's VERY nifty~

I have done a lot of regular covered calls on stock I owned, but didn't find that very profitable. It's much cheaper too to simply buy a call, instead of buying the stock! I joined some website that focuses on covered calls, but it was SO confusing to navigate the site and learn their tools that I bowed out. So this strategy was 'dead' for me until I learned this
"insurance" trick.

I need to practice it to make it work well.

Here are the particulars of Yesterday's trade.

I bought 10 contracts of a November Call with a strike price of $48 for 2.58. (At the Money). Instead of going up, the stock started to drop in price, so I then SOLD 10 contracts of a November call (strike price $49) for $1.83. As the price of the underlying plummeted, the short call (the one I sold) got cheaper in price, so I bought it back for $1.59, netting me .24 cents (x 100 shares = $24.00 x 10 contracts=$240.00.) The original call I bought is still active, and as the stock goes up, it should net me another dime.

I am tickled to death that this works! I can see where you can play the Q's up and down all day long, if you wanted to. But my goal of making $100 per day is starting to look pretty easy.

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