The stock market just set a new record last week, and it has been on the move for quite some time. Some people are hesitant about buying with the bull market having been in full swing for the last couple of years. Some fear a recession, others are waiting for a downturn, and I’m here to show you how to make money in any market with confidence.
Most people view options as taking on extra risk, and that’s because they don’t know them well enough. There is also a difference between putting ‘some money’ in the market and managing a sizable portfolio. Once you have that hands-on experience with more money, it changes the way you view the market.
Options provide protection and diversification. I would urge anyone new to options to explore writing covered calls. This means you sell call options contracts, and they are covered because you have the shares as collateral. Let’s say you wanted to write a covered call on Energizer Holdings.
You have the 100 shares as collateral, and you decide to write a covered call for May, a little over 6 months out. With ENR trading at $48 and change, you decide to target $50 as the strike price. You are quickly going to realize that gives you a $400+ premium, which is yours to keep no matter what.
Now, let’s talk about protection. Let’s say that ENR loses value vs gaining in share price. That $400 premium gives you $4 a share downside protection. That means if ENR slides to $44 a share, you’re still not losing money. You have quite a few options, including averaging down on your position by accumulating more shares of a company you believe in.
Plus, you get the dividends from those 100 shares. ENR currently pays out 30 cents a share per quarter, which means 100 shares would net you $30 a quarter and $120 a year. The more money you have, the more you can duplicate both the success and the protection that covered calls provide.
If the market were in a real downturn, you can also make money by buying puts. You can make serious money by trading options, too, especially when it comes to buying calls. In those cases, you only have to cough up the premium price and you control 100 shares.
Stay focused for now on covered calls and the protection they provide when you have a lot of money in the market. You also increase your return, in many cases shooting for 15 to 20 percent when the strategy is executed correctly.
People point out that you limit your returns with covered calls, but it’s not as cut and dry as it seems. You have all kinds of options, and what you end up doing is maximizing the returns on a dividend portfolio. It’s all about extra diversification, and yes, it does matter which stocks you pick. If you’re not passionate about investing, then it’s not for you. But if you are willing to put some time into it, you can make it your business, no matter what market you’re dealing with at the time.