There are many investment training strategy websites and e-books that promise you incredible things. One of the more common stock market trading strategies taught is to sell covered call options on stocks. These websites maintain that you can earn monthly returns up to 10% or more using that very strategy! Sound excellent? Read on.

I will be the first to admit that selling out-of-the-money covered calls can bring lucrative monthly returns under the right circumstances. I have successfully used this very strategy. But, this strategy is not without its disadvantages. Website and e-book marketers of this strategy fail to educate you properly. They market this strategy as conservative with small risk. They also leave you hanging when it all goes incorrect.

When the stock market is rising in value selling out of the money covered calls works well. Additionally, when the stock market is neutral (not going up or down by any meaningful amount), this strategy also works well. Please tell me when the last time was that the stock market remained neutral for any length of time?

We are currently in the midst of an extremely volatile market. We have recently seen swings in the Dow as much as 200 points in either direction on any given day. Hardly a profitable market for an out-of-the-money covered call writer. Once that stock you are holding starts to decline, so do your profits. I can assure you that profits can evaporate very quickly. I have seen stocks fall from $10 per share to $1 per share over night! There is never enough premium on an option sale to cover that kind of decline.

You want the stock to get called, that is the key to out of the money covered call writing. Many so called experts do not want the stock to get called. They say you should keep the stock so you can continue to sell a covered call option on it in future months. This strategy is flawed. What you should do is select stocks that are moving up in value, in a rising market. Those stocks will make you the most money. I am pleased when a stock gets called because I finished up making the profit that I expected.

What happens if the stock goes way up in value? The stock simply gets called away if it rises up past the strike price and stays there through expiration. Isn’t that what you wanted in the first place? Because you did not participate in those gains you may feel like you left money on the table. If you feel that way just buy the stock outright and don’t sell covered call options on it. Why not just let the stock get called away, take your profit and go on? Then look for stocks to buy and sell calls on for the next month.

Remember, selling out-of-the-money covered calls can provide an brilliant source if income in a rising stock market. But, this strategy is less than ideal in a stock market like the one we find ourselves in today. There are, but, other strategies that will offer significant protection in a volatile or declining stock market.

Marc Abrams Is A Certified Public Accountant With Over 15 Years of Financial And Investing Experience. Visit Marc’s Website at http://www.rebuildingmyfuture.com To Learn More About Writing Covered Calls In Today’s Stock Market

Many websites and e-books on investment training strategies promise you incredible things. Writing Covered call options on stock is one of the most well loved trading strategies taught today. These websites promise that you can earn up to 10% monthly returns using that very strategy. Sound excellent? Read on.

I will be the first to admit that selling out-of-the-money covered calls can bring lucrative monthly returns under the right circumstances. This strategy has been successfully used by me. But, this strategy is not without its disadvantages. The public has not been properly educated by the website and e-book marketers. They market this strategy as conservative with small risk. They leave you holding the bag when it all goes incorrect.

Selling out-of-the-money covered calls works when the stock market is going up in value. They also work when the stock market is neutral, meaning the market trades sideways with small swing up or down. I don’t know about you, but when was the last time the stock market traded sideways for any length of time?

We are currently in the midst of an extremely volatile market. We have recently seen swings in the Dow as much as 200 points in either direction on any given day. Hardly a profitable market for an out-of-the-money covered call writer. Once that stock you are holding starts to decline, so do your profits. I can assure you that profits can evaporate very quickly. I have seen stocks fall from $10 per share to $1 per share over night! There is never enough premium on an option sale to cover that kind of decline.

You want the stock to get called, that is the key to out of the money covered call writing. Many so called experts do not want the stock to get called. They say you should keep the stock so you can continue to sell a covered call option on it in future months. This strategy is flawed. What you should do is select stocks that are moving up in value, in a rising market. Those stocks will make you the most money. I am pleased when a stock gets called because I finished up making the profit that I expected.

What if the stock shoots way up in value? If the stock shoots up through the strike price and remains there at expiration, it simply gets called away. Isn’t that what you wanted to start with? You may reckon you left money on the table by not being able to participate in those gains. If that upsets you then just buy the stock outright and don’t sell covered call options on that stock. Instead, let the stock get called away and take your profit for the month. Then look for another stock to buy and sell calls on for the next month.

Remember, you can make an brilliant source of income selling out of the money covered calls in a rising stock market. But, the stock market we find ourselves in today is less than ideal for this strategy. There are other strategies, but, that offer significant protection in a declining or volatile stock market.