You see, there are no upgrades or downgrades for covered calls, LEAPs, or puts.

It’s because most mutual fun managers can’t see beyond what they have been taught, which has predominantly been to “buy stocks.”

Sure, they’ve heard of options and even know how they work, but they are scared of showing options on their portfolios because the “Average Joe” that invests in mutual funds still looks at options with tremendous skepticism.

They’re dead wrong.

The options market was created for professionals and institutional money managers, who don’t report to the general public, but to their wealthy or sophisticated constituents.

When George Soros took down the Bank of England to the tune of billions of pounds, he did so by using the leverage that options provided him. He saw a trend and figured out how to best capitalize on it with risking less money . If it went against him, he would have lost big, but not nearly as big as someone who was risking it all.

The key to trading options is knowing how to use them to maximize the efficiency of your money. The first – and easiest – strategy for using options is the covered call trade. Here’s how you can use it to separate yourself from the average investor.

Why a Covered Call is “Covered”

In order to execute a covered call trade you need to use both a stock and an option.

The reason it’s called “covered” is because it means that your trade using the option is covered by the underlying shares that you own.

There is no risk to the broker when you execute this trade because if it goes against you, there is protection of equity by the shares you already own. That is why this type of trade can be done by anyone in any type of account, including your retirement account.

When you enter into a conventional covered call trade you are pledging to sell your shares at a certain price (strike price) on a certain date (expiration). For pledging your shares, you will be paid money (premium).

Consider yourself a stock landlord. You are renting your property for any given time, and expect to be paid for it. The money or rent that you receive is yours to keep, spend or reinvest.

In other words, you will have reduced the basis of your stock by receiving money back for the “rental.” Remember that anytime you reduce your cost basis, you have also reduced your risk.

How to Place a Covered Call Trade

An example of a conventional covered call trade would be something like this:

• You buy 1,000 shares of Yamana Gold (NYSE: AUY) for $8.50 per share. You think that Yamana can go to $10 by year’s end. You look at the options chain (a listing of the options available) and find out what the market is buying and selling Yamana’s $10 options for.
• Just like stocks, you buy at the offer/ask and sell at the bid. In this case, you see that the option is trading for $0.90 on the bid and $0.95 on the offer.
• Options are priced in increments of $0.01, $0.05 and $0.10 depending on volume traded, and selling price. In the case of Yamana, this set of options is priced in $0.05 increments.
• Options trade as contracts and each is equivalent to 100 shares of stock. The price is listed in per share amounts but is for 100 shares. So, while the Yamana options are priced at $0.90 by $0.95, the minimum dollar amount that you need to be aware of is for one contract or $90 by $95.

It also means, for the purposes of covered call investing, that you need to own at least 100 shares of Yamana to execute the trade.

• The strike price of $10 means that the buyer or seller of the option is has the right to either buy or sell Yamana at $10 depending on the strategy used and if the contract is bought or sold.
• If the option is sold, as in the case of a covered call trade, the seller of the option is obligated to deliver shares of Yamana to the buyer if the shares close at $10 or higher.

The buyer of the option has the option of taking delivery of the shares or selling the option back into the market.

Getting back to our covered call example, let’s get some other details:

You bought 1,000 shares of Yamana at $8.40, so you paid $8,400. You then sold 10 contracts of the Yamana January $10 call option. (Remember each contract equals 100 shares so for 1,000 shares you must sell 10 contracts.) You sell the options at the bid price of $0.90 receiving proceeds of $900. The $900 comes from 10 contracts, or 1,000 shares, times $0.90 per share.

Your cost in Yamana has now been reduced by 90 cents per share, so it is now $7.50 (8.40 minus $0.90) and the money you received, 90 cents per share is yours to do with what you will.

So how does it all end?

There are three possible scenarios in the works now.

• First, if Yamana closes at $10 or higher at the expiration date in January, your shares will be automatically sold to the buyer of the option at $10 per share, regardless of what price Yamana is trading for, as long as it is $10 or higher.That buyer who you sold the option to was betting that Yamana would close at $10.90 or higher in order for him to make money. Anything less and he loses. The $10.90 comes from the $10 strike plus his cost of $0.90 for the option. If it closes at $10 or higher you will make 33% on your money ($10 strike minus $7.50 cost = $2.50 profit. $2.50 profit divided by $7.50 cost equals 33%).
• If Yamana goes nowhere at stays at $8.40 at expiration you will still make money because you took in 90 cents when you sold the option. Therefore, your return on the trade would be 12% ($8.40 minus $0.90 = $7.50. $0.90 divided by $7.50 = 12%). Since the shares weren’t higher than $10 at expiration, the contract wasn’t executed and it would expire worthless. But you still retain ownership of the shares, free to sell another covered call.
• Finally, if Yamana closes below $8.40, you will still make money since your cost was $7.50. You can only lose money if Yamana closes below $7.50, your adjusted cost and your breakeven point.

Profiting From Covered Calls

As long as Yamana closes below $10, you will retain ownership of the shares and face two options. The first would be to sell your stock and the second would be to sell even more CALL options against your position further reducing your cost. As the owner of the shares you are entitled to any dividends that are paid to shareholders during your period of ownership.

To summarize:

• A covered call trade requires you to own the shares that you then sell options against.

• The money received from selling the options is yours to keep immediately.

• If the shares close above your strike price, they will be taken away (called away) from your account automatically and the money will be deposited in your account.

• Covered calls can be done in any type of account, including retirement accounts.

• Covered call trading can generate additional income while reducing your risk.

Stay tuned over the next few weeks as we break these profitable option trades down even further and we will explore a variation on covered call trading that can reduce your risk substantially while still providing double-digit returns.

Source: Covered Calls: Five Steps to Make Profitable Option Trades

But what is bad for the economy and terrible for the market does not have to wreak havoc on your portfolio. By employing the right strategies, you can multiply your wealth safely in just about ANY market. In fact, there are a number of investment strategies that have never been as safe and profitable as they are today.

Here are several strategies you should strongly consider right now:

• Selling Covered Calls

Selling (also called “writing”) covered calls is one of the safest ways to generate extra income from your portfolio, especially in today’s market. Due to the fear and volatility in the market, option premiums are much higher than their historical averages. As a “seller” of options, that works in your favor. This is a strategy that could easily and safely generate 20% annual income.

Selling covered calls is probably the lowest-risk form of options trading. In fact it is less risky than simply buying stocks. The strategy involves buying a stock and then selling someone else the right to buy it from you in the future. For this privilege, the option buyer pays you cash up front, thus lowering your cost basis for the shares you purchase.

Here’s a hypothetical example of how it works…

Let’s assume stock ABC is trading for $10 and the July call options on this stock, with a strike price of $11 are selling for $1.00. To initiate a covered call, let’s assume you purchase 100 shares of ABC. Then you sell one call option on ABC, representing 100 shares. You would immediately receive $100 in your account, therefore your cost basis on this transaction is $900 ($1,000 – $100).

There are three possible outcomes to this trade:

• If ABC is trading for any amount over $11 at the option expiration date, the buyer would exercise his right to purchase the stock from you for $11. In this case, you would make 22%, based on your cost basis of $9.

• If ABC is trading for less than $11 but greater than $9 at expiration, you would still own the shares at a gain, and you would pocket the cash you received up front. You could then start the process all over, to generate another round of income.

• If ABC is trading for less than $9 at options expiration, you would be holding the shares at a loss. But the income you received up front would offset the loss. And you could repeat the process again to recoup some of the loss and generate additional income.

The key to this strategy is to write covered calls on stocks that you would like to hold for the long term. These could be stocks you already own or new positions. The stocks you select should be those that you believe to be very safe and cheap. And you should employ this strategy at a time when option premiums are large – as they are now. Ideally, you will be selling options that expire within three to five months.

When the strategy works out in your favor (and it will if you employ the rules above), you can generate better than 20% annualized income on a conservative portfolio of stocks. On the occasions when the stocks fall below your cost basis, you would own a stock that you wanted to own anyway… but at a much lower cost than if you had just purchased the shares.

By writing covered calls on high quality dividend-paying stocks you can get an extra bonus. Best case scenario, you will keep the option premiums, you’ll keep the dividends, and you’ll keep the stock too!

• Selling Puts

Selling puts is another strategy that can generate an annualized yield in the neighborhood of 30% – 50%. When executed properly, a put selling strategy can be highly profitable and carry very low risk. This is especially the case in a market like we have today, where fear is high and option prices are elevated.

You can also sell puts with the goal of generating income. In this case, you want the put to expire worthless so you can capture the option premium. To accomplish this goal, you sell puts that are out of the money on stocks you believe to have very little downside risk… and which you would be willing to purchase at a much lower price, if necessary.

Here is an example…

Let’s assume that stock XYZ is selling for $13. We’ll also assume the stock has already fallen a significant amount (not too hard to find in today’s market) and you believe the rock bottom liquidation value of the company is $8.

With the stock trading at $13, the July $10 put option is well out of the money and selling for $1.50. You decide to sell these puts. When the trade closes, $150 will automatically show up in your account for every contract you sold.

The only way you could lose money on this trade is if XYZ trades below $8.50 ($10 – $1.50) on or before the option expiration date in July. That is a 35% drop from the depressed level the shares of XYZ are trading today.

And in the unlikely event that you were obligated to purchase those shares, you should still come out okay. After all, the liquidation value of the company is $8 a share and your cost for those shares is just $8.50. So the downside risk should be very small.

Remember, this strategy should be employed on stocks where you believe the downside risk to be minimal. And you should only employ this strategy on stocks that you would be GLAD to own at a price below where you sell the put.

You should also have a reasonable understanding of the true valuation of the company. For this reason, I would exclude most financial and insurance companies from this category, as very few people (including the insiders) have any idea how much these companies are worth or what is on the books.

In today’s market, you can expect a well executed put selling strategy to generate an annualized yield of 30% to 50% with limited risk. Selling puts in this environment and following the rules above can put big odds in your favor.

By selling put options, you could buy super-high quality stocks as much as 50% cheaper than today’s historically low prices. PLUS you’ll get cold, hard cash deposited in your account instantly… adding to your annual income!

Where You Can Learn These Strategies… and a Lot More!

By no means are these the only strategies that can be highly profitable in today’s market. We are also seeing a once-in-a-generation opportunity in high quality corporate bonds. Invest in the right bonds and you can see significant capital gains plus income… without taking stock market risk.

This is also an excellent market for shorting stocks. But you should not go out and just short any stock. The inevitable bear market rallies could put you in the poorhouse. The lowest risk opportunity is to short those stocks that are almost certainly going to zero – companies with an impaired business model and a massive debt load. There are dozens, if not hundreds of these companies out there.

Now for some even better news: you don’t have to do all of this on your own…

In June, at the Turnberry Isle Resort & Club in Miami, Investor’s Daily Edge and Mt. Vernon Research have asked nine top investment experts to share their number one strategy and top recommendations that are making a fortune in today’s market. Of course, all of the above topics will be covered.

To learn more about this conference and the once-in-a-lifetime opportunities we’ll be discussing, click here.

Source: Two Strategies Perfect for Today’s Market