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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10149
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Is it possible to make a very good living (5+% week) buying

Customer Question

Is it possible to make a very good living (5+% week) buying stocks and selling covered calls on them with the premiums being the income? What are the downsides?
Submitted: 5 months ago.
Category: Finance
Expert:  Lev replied 5 months ago.

Yes - that is possible - if you are successful and knowledgeable trader.
The downside is that the gain will be included into taxable income, but if you have a loss - that loss may be fully used to offset the gain, but net loss deduction will be limited to $3000 per year.

The main downside is that the gain is not guaranteed - and if you have a gain - that actually means - someone realized losses - and that someone may be you...

Customer: replied 5 months ago.
Is 5+% a week gain realistic? It seems to be when I look at stock prices compared to their option premium prices.
Expert:  Lev replied 5 months ago.

Yes - that is realistic - and some successful traders are doing more than that - but - again - when someone gain - someone must to lose...

Expert:  Lane replied 5 months ago.

I disagree.

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When you sell covered calls, you’re usually hoping to keep your shares of the underlying stock while generating extra income via the option premium.

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You’ll want the stock price to remain below your strike price, so the option buyer won’t be motivated to exercise the option and grab your shares away from you.

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That way, the options will expire worthless, you’ll keep the entire option premium at expiration and you’ll also keep your shares of the underlying stock.

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If your stock’s price is neutral or dropping a bit, but you still want to hold onto the shares longer-term, writing covered calls can be a good way to earn extra income on your long position.

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But remember, you’re also a stockholder, so you’ll most likely want the value of your shares to increase – just not enough to hit your covered call’s strike price. Then you won’t just keep the premium from the options sale, you’ll also benefit from the shares’ rise in value. You’re really loving life if that happens.

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And to state the obvious, covered calls obviously work in a down market (although selling, or shorting, works even better).

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The question that needs to be answered is do they work in an up-market and a normalized market that has its ups and downs?

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And after the much needed breather we've had over the last year and 1/2 (after four straight years of double digit returns) once the political uncertainty leaves the market (getting very close) and once supply and demand for oil normalizes (already beginning to happen) we're very possibly in for the REST of this bull market 2018, 2019, 2020.

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And sure, one can always "play" with strikes and achieve any comparative result, regardless of how the market moves.

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To do the analysis, although underlying every portfolio is different, you might want to look at two indices that track Covered Call strategies, one with at-the-money calls, BXM and one with calls 2% out-of-the-money, BXY.

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What I think you'll find (again this is against the S&P 500 rather than YOUR portfolio), 2% OTM covered calls on the S&P 500 seem to enhance portfolio performance, but after transaction costs, not as much as you might think.

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But 5% a WEEK?, never seen it in my 30+ years.

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Is it POSSIBLE, yes... Is it probable (not historically).

Expert:  Lane replied 5 months ago.

Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

I receive no crediting for the work here until you rate

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Thank you!

Lane

I have a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP and CRPS designations. - I’ve been providing financial, Social Security/Medicare, estate, corporate, both for-profit and non-profit, and tax advice on three continents, since 1986

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