Covered Calls - A Great Cashflow Strategy

What Are Covered Calls

For options traders, covered calls are the easiest and by far the safest strategy when dealing with options contracts. Essentially, covered calls are call options that have a backing of an underlying stock or share. In other words, if you sold x number of call options for XYZ shares, you also own that many shares of XYZ to cover for the event that you may get exercised. This is a great strategy for income generation of shares or stocks that you own.

The Income Generating Strategy

Basically, if you bought shares of a company, your money is locked away to that investment and not earning any interests in the mean time until you sell it at a higher price. If you sold call options for these shares that you own, you will receive a premium which you get to keep regardless of whether you get exercised or not. Thus, if you understand how options work and also understand how the share price have moved over the past few months, you will be able to use this strategy to constantly generate extra income until such time that you are ready to sell your shares.

The options trading strategy I would recommend for covered calls would be to find a strike price that is above your share purchase price, and ensure that there is a less probability of that price being hit or exceeded by expiry date. Another area to look at is also the premium amount that the market offers for that particular call options contract. You have to ensure that the premium is good enough such that if in case you get exercised, you have also received a decent amount to cover for the loss of potential capital growth of your shares.

Covered calls are great for bullish shares or bullish markets. You would ideally like to sell your shares and get options at a higher strike price, therefore this is perfect when the market is more or less guaranteed to rise, with lesser risk to the downside.

If you want more in-depth information on covered calls and options trading, Planet Wealth offers great educational materials and support, and have the expertise to show you how to trade options. Planet Wealth's team of experts also trade options on their own, and would only recommend options trades for those that they will trade themselves. Thereby, you can feel at ease with their expertise. Check out Planet Wealth's website for more information.

Options Trading Terminologies

Basics on Options Trading

I'd like to get back to basics and explain what options trading is. Options Trading is basically the trading of options contracts that is exchanged between the buyer and the seller of an asset (in the case of the stock market, the stocks). That gives the buyer the right to either buy or sell a particular asset at an agreed date and at an agreed price. In return, the seller of the option receives a certain amount of payment as premium from the buyer. There are 2 types of options: A call option and a put option.

Call Option
Call Option gives the holder the right but not the obligation to buy the stock for an agreed price at an agreed time. If the call option is struck or exercised, the buyer of the call option is then able to purchase that particular stock for the agreed price, and the seller of the call option is then obliged to sell the stock at the agreed price.

Put Option
Put Option gives the holder the right but not the obligation to sell the stock for an agreed price at an agreed time. If the put option is struck or exercised, then the buyer of the option is obliged to sell the asset or stock. The seller of the put option, if exercised, is then obliged to buy the stock or asset.

What does "Exercise" mean?
Exercise means that the price of the stock has hit or exceeded the agreed price on the option on or before the specified agreed date. This means that the options contract has to be executed, and that is what "being exercised" mean.

Options Contract
Options are traded by contracts. A contract is comprised of:

• The quantity and the class of the assets (in the US, a contract is 100 shares , in Australia a contract is 1,000 shares)
• The exercise price at which the options trading happens;
• The expiry date
• The premium price that would be settled to the writer (or seller) of the contract, OR the premium to be paid to the taker (or buyer) of the contract.

Options trading follow different styles. The most common ones are:

• American options trading – In this options style, an option can be comfortably exercised on on any trading day on or before the expiration date.
• European options trading - In this options trading style, the options can only be exercised at the time of expiration only.

These are just the basics of options trading. More information is available with Planet Wealth and the e-books that they offer, which I find are just awesome with explaining the finer details of Options trading.

I hope this has been a beneficial post on Options Trading by Planet Wealth Systems!

Credit Spreads - unveiling the myth

What is a Credit Spread?

Credit Spreads are a great way to make money in the market without having to own any shares. I'm assuming for this post that the reader already has some understanding of what options are. If you want to get an idea of what they are, I have briefly discuss them on my first post. This strategy is offered by Planet Wealth and is a staple of their trading strategies.

Credit Spreads use 2 legs of options in a strategy wherein you sell an option to make money from the premium, and you also buy an option as a protection in case things don't turn out to be what you expect, and then pay an insurance fee for it. In this strategy, the premium you receive is always much greater than the insurance fee that you paid for, and the net amount is called the credit. Also, with this strategy, generally there is a difference or a spread between the strike price of your buy option and your sell option. Hence, it is called credit spreads.

There are 2 types of credit spreads:

• Bull Put Spread
• Bear Call Spread

Bull Put Spread

A Bull Put Spread is used when you have a bullish view of a particular stock. This strategy generally involves buying a Put at a lower strike price than the strike price of your Sell Put. For example:

You buy a Put of XYZ Corp at the strike price of $10.00 for March 09 for a fee of 10cents
You sell a Put of XYZ Corp at the strike price of $10.50 for March 09 for a premium of 25 cents

You then have a net of 15cents. If you stay on the trade, and the share price of XYZ Corp stays above $10.50, then you get to keep the 15 cents premium! Obviously, all these comes in lots of 1,000 per contract, so imagine if you had 20 contracts of these! That would be a potential profit of $3,000 out of a $10,000 risk! That is a good return on investment!

Bear Call Spread

A Bear Call Spread is the opposite of the Bull Put Spread in that this strategy is used if you have a bearish view of a particular stock or share. This involves buy a call at a higher strike price than the sell call for this share.

For example:
You buy Call option of XYZ Corp at the strike price of $15.00 for March 09 for a fee of 8cents
You sell Call option of XYZ Corp at the strike price of $14.50 for March 09 for a premium of 20cents

The result is a credit of 12 cents. If you stay on the trade, and the share price of XYZ Corp stays below $14.50, then you get to keep the 12 cents premium!

Obviously these are just examples, and you need to look at your charts and take a view on where the direction is for a specific share.

There is definitely more information on the e-books offered by Planet Wealth, and if you're serious with making money using this strategy, get your copy NOW! I can only say that it's been the best $99 investment I've made, and on my first month, I've already recovered it from my successful trade!

I hope this has been another beneficial post, and one that would encourage you to take the next step, if you haven't already done so.

Another sharemarket secret unveiled!

"Share Renting" strategy - a great income earner for Bull Markets

What is "Share Renting"?

Share Renting is a term coined by Jamie McIntyre of 21st Century Academy to simplify an options strategy that can be used to generate extra income when you hold physical stocks or shares. Share renting is being used to form an analogy with owning a property and renting it out to a tenant, and making an income from rental. This is one of the strategies that are being taught in more depth by Planet Wealth. Basically, the strategy is this:

1.) Own the physical shares or stocks. If you're investing in the Australian market, you must hold at least 1,000 shares (or multiples of 1,000). In the US markets, you can go for at least 100 shares (or multiples of 100). This is so you can apply the options strategy on top of the stock or share that you purchased.

2.) Sell a Call Option - When selling a call option, you get a premium or "rental income" for agreeing to sell your stock at a certain date for a specified price. Choosing an option to sell will depend on the price level that you purchased the shares, and the expectations/views/predictions that you or the market have on the particular stock or share at a certain date.

The trick is, you should choose a call option at a higher price and with a price that you think it will not reach or hit at the expiry date. Each option has an expiry date, and you also need to look into this to work out if your view is for within the month or within the next 2 months, etc. This is one of the factors that will determine how much income you will make out of the premium.

For example:

You purchased 1,000 shares of Company XYZ @ $2.00
You foresee that this stock, based on existing market conditions, and based on previous movements, will not go up to $2.50 in the next month.

The $2.50 Call Options strike price for next month is paying 15 cents premium.
You can sell 1 call options contract for Company XYZ and earn $150.

If Company XYZ doesn't reach $2.50 at the expiry date, then you get to keep your shares, and you also get to keep the $150 premium! If you continue to have a bullish view of the stock or share in the long run, you might want to keep it. Hence, the strategy is to find a strike price that is more likely not to be hit or reached.

If it does hit the $2.50 strike price, then you would have to sell the shares for $2.50, which then means that you still made money on the stock or share ($500 in this instance, plus the $150 premium). Either way, you win!

Not a bad strategy for a Bull Market! You can still do this on a bear market, but you have to be bullish on the stock that you own and not make a loss on it if the call options are exercised.

I've learned all of this in more detail through Planet Wealth, and more details are on their e-book, so check them out! I hope you've learned another options strategy today.

Another Sharemarket Secret unveiled! Til the next post!