Writing Covered Calls Is Stupid

Dear Terry -   

 

Writing covered calls is a stupid way to maximize investment returns.

 

More than a dozen websites advocate writing covered calls as a sound investment strategy.  Thousands of subscribers pay millions of dollars to get advice on profitable covered calls to write.

 

I believe they are wasting their money.  Writing covered calls only limits the potential gain you might enjoy.

 

Letís take an example.  You buy 100 shares of XYZ for $80 and write (sell) an at-the-money two-month call ($80 strike price) for $4.00.  If the stock stays flat, you will earn 5% on your money for the period (plus collect a dividend if there is one).  If you can do this six times a year (write a 2-month call 6 times), you will earn 30% annually (less commissions); or so goes the promise. 

 

That is the maximum amount you can earn.  No matter how high XYZ goes in price, you can never earn more than 30%.  And the bottom line truth is that you will NEVER earn that 30%.  The reason is that no stock price ever stays the same.  If the stock goes up by $5 in the first sixty days, you will either lose your stock (through exercise), or more likely, you will buy back the call you wrote, paying $5, and losing $1 on the call (but making $5 on the increase in the price of the stock).  So for the first 60 days, you actually made a 5% net gain.

 

Presumably, you then sell another 60-day at-the-money call (now at the $85 strike) and collect perhaps $4.25.  Then the stock falls back to $80.  Your gains on the calls you wrote now total $3.25 for a 120-day period (you lost $1 in the first period and gained $4.25 in the second).  The stock is flat (just what you hoped to earn your 30% for the year). 

 

At this rate, your annual return will be $9.75, or 12.2% on the original $80 stock.  Commissions on six sales of calls over the year will considerably reduce this return - to 10% or so.  Not a bad return, but certainly not 30%.  And itís an awful lot of work for a 10% return.

 

What is even better than writing covered calls?  My 10K Strategy, of course.  This strategy can make over 100% a year in good years and bad.  It involves buying long-term options (usually calls), and selling short-term options against them (most of the time being careful not to sell as many options as you own).

 

At the beginning of 2003, I put $10,000 in an account to demonstrate how my 10K Strategy worked.  I decided to invest exclusively in the NASDAQ 100 tracking stock (QQQQ) to avoid the difficult decision of picking the right stock.  I told Terry's Tips Insiders every trade I planned to make before I made it so they could mirror my trades if they wished.

 

By the end of the year, the account had grown in value to over $29,600, an incredible increase of over 196%.

 

Has anyone ever made 196% in a single year by writing covered calls?   I donít think so.  But every single person who followed my advice in 2003 made 196% with my 10K Strategy (the same strategy I used, with a few tweaks, to make over 200% on Fannie Mae while the stock fell by 8.6%).

 

This same strategy earned an average annualized gain of 103% for 8 actual portfolios we offered in 2005. Results were not as extraordinary in 2006, but any subscriber who mirrored all our portfolios would have gained over 44%.

 

If you donít want to mirror my trades (it does take a little effort), you can have your broker make the trades for you through their Auto-Trade program.  More details on these programs coming soon.

 

I invite you to learn all the details of investing in the 10K Strategy as well as other profitable option strategies that have proved to be more successful than writing covered calls.

 

You have only 2 days, until midnight on Monday, August 25 to take advantage of my special offer - For a one-time fee of only $79.95, you receive the White Paper (which normally costs $79.95 by itself), my special report –"How the 2005 Apple Portfolio Doubled in 4 Months", a $50.00 value, and 2 months of the Terry's Tips Stock Options Tutorial Program, a $49.90 value.  But you must sign on by midnight on Monday, August 25. Select Option #1 and enter Product Code 196.  Click on https://www.terrystips.com/secure/order.php to join.

 

Become a Terry's Tips Insider today, and enjoy a lifetime of extraordinary gains, and forget about writing covered calls forever.  It could be the best investment you ever make.   Terry