Labor Day is both the end of the sleepy summer market as well as the final long weekend before we head into fall and the end of the year. In fact, I happened to take a relaxing weekend away from the markets myself, spending some beach time with friends and family. To the delight of my friends (and the horror of my wife) I found a cozy place to take a nap on the beach.
Why share this? 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, during the end of summer.
Take, for example, these market leaders that have not gotten going even as the market has grinded higher, and their returns for the month of August:
Advanced Micro Devices (AMD) up 1.9%
Applied Materials (AMAT) lower by 4.8%
KKR & Co. (KKR) up 1%
Snap Inc. (SNAP) up 3.5%
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 …
Using 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 in August, after 30 days I would be up 1.9%. 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 1.9%.
Similarly, if I had sold the SNAP September 80 calls for $4, and collected $400, 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.
Do you use covered calls? If so, tell us how they have enhanced your portfolio.