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Strategies & Market Trends : Buy and Sell Signals, and Other Market Perspectives
SPY 680.44+0.6%Dec 19 4:00 PM EST
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To: GROUND ZERO™ who wrote (22029)7/25/2011 3:44:08 PM
From: Kirk ©1 Recommendation  Read Replies (2) of 220454
 
A BIG trouble with using covered calls is they tie up your capital

In exchange for a nice, safe income you give up the ability to be more active... ride surges until they run out of gas THEN sell shares to buy back on the pullback, etc.

for example,

Say XX is at $40 and you write a September covered call for at $42.50. You need 100 shares in your account that you agree to let sit there until Sept expiration.

IF XX surges to $50 on great news tomorrow, then you still have to keep those shares until called or the option expires... since the owner of the call has no incentive to cash in early, especially if he thinks it can go higher. You only get your money if the owner of the call cashes in...

But if you hold the shares without calls and the stock surges to $50, you can sell and get your cash immediately. Then if the stock pulls back to $40... you can buy your shares back and have a nice 20% gain for the round trip.

If you sell the call and it isn't exercised on the round trip from $40 to $50 back to $40... you get nothing other than the premium for selling your call.

Hopefully, that was simple and clear enough for everyone. Selling covered calls is a decent way to make money for some... but all it takes is a few gaps well through your strike price to sour on the idea if you are like me and look for bigger gains for my trading stocks.
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