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The 10 Most Common Mistakes Made By Covered Call Writers And How To Avoid Them

Your neighbor bursts into your house and exclaims “I just read this article…You buy a stock and sell an option and cash flows into your account instantly. It’s a miracle! I’m getting started tomorrow”  If you are a good neighbor and knowledgeable about covered call writing you will immediately tie him to a chair, put tape over his mouth and explain to him that there is no such thing as a free lunch.

There is so much more to this strategy than what your neighbor read in the article. The most vulnerable investor is the one who thinks he knows everything but in reality knows very little. He must learn when to begin risking his hard-earned money and what his goals should be. Should we look for the highest returns? Many covered call writers do. As a matter of fact, some subscribe to newsletters that generate lists of the highest ranked stocks based on option returns…very dangerous.

Since there are two components to this strategy which is more important, the stock or the option? Which option do we select? If your neighbor is not prepared to answer these questions, he is not ready to execute trades. What if the trade turns against him? Can he control the outcome?  He doesn’t  know! Didn’t think of that… well then he’s still not ready…keep him tied to that chair.

Explain to Mr. About-to-be-broke that there are pitfalls to watch out for. Tax issues…maybe. Has he decided on which brokerage makes the most sense using this great strategy? No…the tape stays on. Give him a pen and paper. How many positions should you hold? How much cash should be allocated to each position? Specifically, which system will he employ? If the paper remains blank, show no mercy. You’re simply being a good neighbor and he will thank you for it.

Okay, it’s time to show some compassion here. Tell him that if he agrees to watch this brief video, you will release him from this bondage, remove the tape and give him the opportunity to become CEO of his own money:

Here is part of an email I received a few days ago from an impressive new member who is the opposite of Mr. About-To-Be-Broke:

Alan, 

Your Books, Your Blog, Your Video’s all fantastic!! Clean, sharp and logical!! 

The system/report is going great, I am now into my 6th month of paper trading and I’m about to go live in the next couple of weeks. My returns have been 2-5% per month over this period, which when compounded is a fantastic return. 

So thanks for that:)

Conclusion:

Master the strategy– Practice the system- Generate Cash- Become CEO of your own money.

Next Speaking Engagement:

Feb. 18th, 2013 (President’s Day) Money Show’s Stock Trader’s Expo
New York City, NY
Coming up in March:
Coral Springs, Florida: March 21, 2014 (details to follow)
Market tone:
This was a light week for economic reports:
  • Retail sales increased by 0.1% from January, up for the 3rd consecutive month
  • Business inventories ( A report of the dollar value of product inventories held by manufacturers, wholesalers, and retailers. Included in the report is the inventories/sales ratio, a gauge of the number of months it would take to deplete existing inventories at the current rate of sales, which is an important indicator of the near-term direction of production activity) rose slightly (0.1%) but less than the 0.3% anticipated according to the Department of Commerce.
  • Initial jobless claims for the week ending February 9th came in at 341,000, less than the 360,000 expected
  • Industrial production (a measure of the changes in quantity of physical materials and items produced in the manufacturing, mining, and utilities industries. Industrial production and capacity utilization are significant indicators of trends in the industrial sector) dropped unexpectedly in January by 0.1% while experts were anticipating a rise of 0.2%. However, revised data for November and December produced the first back-to-back increase in 30 years

For the week, the S&P 500 rose by 0.1% for a year-to-date return of 6.8% as shown in the chart below:

S&P 500: year-to-date

S&P 500: year-to-date

 

Summary:

IBD: Confirmed uptrend

BCI: Moderately bullish favoring out-of-the-money strikes 3-to-2

 My best to all,

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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11 Responses to “The 10 Most Common Mistakes Made By Covered Call Writers And How To Avoid Them”

  1. Ron February 16, 2013 2:31 pm #

    Alan,

    I want to thank you for this article and video and let you know that I’m really glad I found your site. I’ve been doing covered calls for over a year and find myself guilty of most of the mistakes you talk about. I’m looking forward to taking your advice and improving my results. Thanks a lot.

    Ron

  2. Barry B February 16, 2013 3:24 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 02/15/13

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Since Earnings Season is in full swing right now, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,

    Barry and The BCI Team

  3. Steve Z February 16, 2013 6:05 pm #

    Ten excellent reminders. Thanks. Steve

  4. Mike February 16, 2013 6:37 pm #

    Going for the highest premiums-guilty as charged. Thanks for the tip.

    Mike

  5. Bill P February 17, 2013 1:03 pm #

    Alan, just to recommend another on line broker, I use fidelity and they have a program called active trader pro that I really like. The fees for trades are in the $7 range and I use the covered call stategy in my tax sheltered accounts

    Missed your last seminar in Atlanta, hope to make the next one.

    regards,
    Bill

    • Alan Ellman February 18, 2013 4:23 pm #

      Bill,

      Thanks for the suggestion.

      I’ll be back in Atlanta on Saturday April, 20th speaking @ The Atlanta Options Investor Club @ Georgia State University. Keep an eye on this site for further details. I hope to meet you in person at that event.

      Alan

  6. David Friedman February 17, 2013 3:58 pm #

    when are you coming out to SoCal? Love to attend your seminar in the LA-San Diego area. You do a great job with the videos and the training. All the best.

    david

    • Alan Ellman February 18, 2013 4:26 pm #

      David,

      I’d love to come out to the west coast. Linda and I have family in San Diego and Los Angeles. Almost all my seminars come as a result of an invitation. If you know of a large stock investment club in your area that would benefit from a covered call writing presentation, have them contact me and we’ll see what can be worked out. I only have one or two slots available through the end of the year.

      Thanks for your kind words.

      Alan

  7. Jeff S. February 18, 2013 6:50 pm #

    Alan,

    Thank you for helping me to finally make a steady profit in the stock market. I noticed this week’s Running List (2/15/13) is formatted differently than usual. I really like the stocks listed by date of earnings reports but this week they are listed alphabetically. What’s up with the change? Thanks again for your valuable service.

    Jeff S.

    • Alan Ellman February 18, 2013 7:19 pm #

      Hi Jeff,

      We just got back from our Money Show presentation (standing room only!) when I saw your post. First, great to hear of your investment success, thanks for sharing.

      When the stock reports are formulated the last step is organizing by ER dates. Evidently, the “almost finished” version was uploaded to the premium site. I will make sure the final version is uploaded this evening. Thanks.

      Alan

  8. Barry B February 18, 2013 8:52 pm #

    Premium Members:

    This week’s Weekly Stock Screen And Watch List has been revised and uploaded to The Blue Collar Investor premium member site and is available in the “Reports” section. The Running List Earnings Report section has been reorganized and sorted by earnings report date. Look for the report dated 02-15-13 RevA.

    No changes have been made to any screening data other than sorting by the earnings report date.

    Best,

    Barry and The BCI Team

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