How is your trading going these days? I ask that because we all know how crazy the markets have been so far this year. It seems that whether you are bullish or bearish, for the most part, you have probably been wrong either way. With the sometimes daily swings and huge reversals, it is very hard to know which way to go.
I am constantly asked what types of trades are working in this crazy market. We don’t need to make things complicated here. I always talk about keeping things simple, and now is the time to do that. In a whippy, crazy market, I like to go back to the “old school” Covered Call strategy.
I know what you are saying… Covered Calls are boring… EXACTLY. That is what you want in a treacherous market is a boring trade you won’t lose sleep over.
Covered Calls are mostly overlooked by “active” options traders, but they can be a very effective strategy. The strategy is a slow and steady approach that doesn’t require much oversight. The key to having a good covered call trade is in choosing the right underlying stock. I tend to look for boring type stocks that pay good dividends. In this way, while we are “waiting” on our trade to work, we can collect dividends as well.
One other reason that Covered Calls are generally overlooked is that people are skeptical of the “lower” return that is typical of the trade. By “lower” return, I am still looking at around 1-2% per month which I think is very reasonable. I can argue this point either way, and the returns may be less than a typical options trade. However, this is designed to be a lower risk trade so you should expect a lower return. The other side of the coin is that consistent smaller returns can add up over time.
Lastly, some traders feel that the covered call strategy is just too boring. While it is true that there is not much to do or watch with the trade, you should ask yourself what do you want to accomplish out of your trading? Do you want excitement and entertainment, or do you want a consistent return? I prefer to hit singles and doubles for a consistent return in a volatile market. In this way, I don’t have to lose sleep as the market gaps one way or the other. If this market is making you grab the Pepto-Bismol, you should consider adding covered calls to smooth out the bumps.
Get more trade ideas from Bruce Marshall’s Income Advisory Service.