Covered calls: a strategy for the adventurous investor

At the risk of sounding like a conspiracy theorist, I firmly believe that most investors are intentionally kept in the dark about anything that breaks away from the "buy stocks and mutual funds" mantra that makes Wall Street money.

Most mutual fund managers can't see much further beyond Investing 101, and too many people in general are sceptical of options altogether. The problem is that they have no idea what they're missing.

The options market was created for professionals, institutional money managers, and those who report to their wealthy, sophisticated constituents instead of the general public. But that doesn't mean that the average Joe and Jane can't use it too. They just need to get a few pieces of inside information first.

When George Soros took down the Bank of England to the tune of billions of pounds, he did it by using the leverage that options provided him. Basically, he saw a trend and figured out how to exploit it legally and with a surprisingly small amount of risk.
Sure, if it went against him, he would have lost out big time, but not nearly as much as someone who played the game the usual way. You see, the key to trading options is knowing how to use them to maximize the efficiency of your money. And the first and easiest strategy for doing that is the covered call trade...


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A Strategy You Should Consider

With the explosion of option use in recent years, you may be asking yourself “what are options, and why would anyone consider using them?”

Options represent the right (but not the obligation) to take some sort of action by a predetermined date. That right is the buying or selling of shares of the underlying stock.

There are two types of options, calls and puts. And there are two sides to every option transaction -- the party buying the option, and the party selling (also called writing) the option. Each side comes with its own risk/reward profile and may be entered into for different strategic reasons.
What's a call option?
A call is the option to buy the underlying stock at a predetermined price (the strike price) by a predetermined date (the expiry). The buyer of a call has the right to buy shares at the strike price until expiry. If the call buyer decides to buy – also known as exercising the option -- the call writer is obliged to sell his/her shares to the call buyer at the strike price.

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