How to Use Covered Calls to Make Money in Sleepy Markets - Cabot Wealth Network

How to Use Covered Calls to Make Money in Sleepy Markets

Bogged down during the summer months, stocks have been moving sideways. But if you use covered calls, you can boost your profits quickly.

This past weekend my family and I went to the beach with friends. It was super relaxing to get away from the markets, soccer practice carpooling, and the day-to-day grind. And as usual, much to my friend’s delight, and my wife’s horror, I found a comfortable place to take a nap on the beach right next to our family’s dog, as seen below:

So why am I showing you that I can fall asleep on the sand for hours on end?

First off, I really enjoy making fun of myself. But in terms of trading, me snoozing on the beach is a terrific representation of the countless stocks that have largely gone to sleep, and traded sideways, for the past month.

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Take, for example, these market leaders that have not gotten going even as the market has grinded higher, and their returns over the past month:

Advanced Micro Devices (AMD) up 1.5%

Applied Materials (AMAT) lower by 4%

KKR & Co. (KKR) down 4%

Snap Inc. (SNAP) down 4%

This list of sloppy stocks could be pages long, but my point is little money has been made during the “dog days of summer.” That is unless you were selling covered calls against these stocks. This is what I mean …

How to Use Covered Calls to Boost Your Profits

A covered call is a strategy that consists of owning an underlying stock and selling an option against the stock. Since a call option represents 100 shares of the underlying stock, you can sell one call against each 100 shares of stock you own. Because you own the stock, your short call position is “covered” by the stock.

A short option position by itself (without the stock) is very risky, and requires a substantial margin balance.

A short call on a stock you own, on the other hand, is a very conservative strategy that requires no margin.

I would recommend a covered call options strategy against virtually any stock an investor holds. In my mind, it’s free money, and best of all, it’s a great way to start learning about options and options trading.

Let’s dive a bit deeper into this strategy using a couple of the stocks mentioned above that have traded sideways.

Had I bought 100 shares of AMD a month ago, after 30 days I would be up 1.5%. That is a fine return, but big picture, AMD could be down a couple dollars tomorrow and I would be back to where I started.

However, a month ago if I sold an AMD September 115 call for $6 against my stock holding, which is actually $600, my yield would be as high as 6.5% as this call appears to be on its way to expiring worthless, while my stock holding is up 1.5%.

Similarly, if I had sold the SNAP September 80 calls for $4, and collected $400, this call sale would have offset all of the stock’s declines in the last month, and I would have had a bit of profit.

The downside to this strategy is by selling a call against my stock holdings, if AMD and/or SNAP exploded higher, I would not have participated in the large stock gains, as the buyer of the call would have exercised his right to buy the stock from me. In the case of AMD, I would have made money until the stock traded above 115; however, above 115 my profits would have been capped.

That being said, in that scenario we still would have locked in profits ranging from 5% to 10% in one month’s time.

This is the exact strategy we use at Cabot Profit Booster, where we sell covered calls on Mike Cintolo’s weekly Cabot Top Ten Trader stock picks, which are 10 of the week’s strongest momentum stocks. We are looking to buy the best-looking stocks, as chosen by Mike, and then sell covered calls against those stocks to rack up yields ranging from 3-20% month after month.

If those sound like the kinds of monthly returns you’d be interested in – or if you simply want to learn more about covered calls or options trading in general – click here to become a Cabot Profit Booster subscriber.

Do you use covered calls? If so, tell us how they have enhanced your portfolio.

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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