There’s a common misconception out there that investment strategies which require you to step outside the “buy and hold” model – particularly, the use of options – are only suitable for the most aggressive, risk-averse traders.
Well, I’m here to tell you that this isn’t always the case, especially when it comes to “covered calls,” which is about the most conservative options strategy around. As I’ve written before, this method of selling call options against a long stock position is a quick, easy way to bring in additional income in the form of option premium. And unlike a lot of other trading strategies, it’s typically allowed in IRAs and similar accounts, which makes it perfect for retirees.
Click to EnlargeBoston Scientific (BSX)’s chart is showing a great set-up for a covered-call trade. As you can see, this medical-device industry leader is in the midst of an uptrend, helped by news earlier this year that the U.S. Senate supports repealing the measure of the Affordable Care Act that calls for a medical-device tax. That being said, from a technical standpoint this uptrend seems to have limited upside in the short term.
My recommendation for BSX is that for every 100 shares owned (or purchased), you “sell to open” one contract of BSX Aug. $10 calls at $0.20. The total option premium you’d receive for selling the call would be $20 per contract — $100 for five contracts, $200 for 10 contracts, and so on.
If BSX stays where it is now (about $9.23 at the time of publication) or lower, the calls will expire worthless; you will have pocketed the option premium and will be free to either trade the shares themselves – or to sell calls again in future months. If BSX does rise through the $10 level, then your potential gain on the position is 9.1%, based on an entry at $9.35, the strike price of $10 and the $0.20 in option premium. That’s the great thing about trades like this: whether the buyer of your calls exercises the option contracts or not, you will make money in both potential scenarios.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with a the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.
Stay tuned! Bryan is currently working hard on a brand new strategy that amplifies your income potential by utilizing a conservative options strategy based on stocks you may already own.