I’ve been writing covered calls since the 1990s. None of my friends or relatives ever heard of this strategy and no one I knew was using it. Back then, there were very few books on the subject and average retail investors had little or no interest in learning about this strategy or options in general. It is for the Wall Street Fat Cats, many thought. All that has changed because of the explosion of the baby boomers onto the options trading scene. Quality education is now available, options products are growing in numbers and improving in caliber and the playing field is leveling out for retail investors. Besides these factors, many boomers were planning to retire until the debacle of 2008 threw a monkey wrench into those plans. They needed choices to compensate for those losses.
So what does a typical options trader look like? According to the Options Industry Council, the average options trader is 53 years old and 28% of all traders are between the ages of 55 and 64. Furthermore, these investors are driving up options trading volume by 16% over the past 10 years according to the OCC (Options Clearing Corporation), the world’s largest equity derivatives clearing organization. The common motivating threads seem to be to generate income to facilitate retirement and to make up for lost resources from the recession of 2008.
Brokerage firms like TD Ameritrade, E Trade and Charles Schwab Corp. have enhanced their options trading platforms to take advantage of this exploding market. The ballplayers want to play, the ballparks are available and ready and the cost to get in (aka trading commissions) are lower than ever. Play ball!
So why covered call writing? Options trading can be risky. It can also be a low-risk way to generate a decent monthly cash flow. “No grand slam homeruns with covered call writing” as I say in my books…just singles and doubles. Most traders new to options could be overwhelmed with complex options strategies and should avoid them until well-educated and experienced in those areas. So they tend to favor more basic strategies and those that favor capital preservation. One such strategy is covered call writing. I all my years of interacting with options traders from all over the world, I have never experienced this level of interest I am seeing recently in covered call writing. I love it!
One of the reasons is that this is a 2-part strategy, owning the stock and selling the option. Most neophyte options traders are fairly well versed in part I. They are half way there! This is appealing to many as opposed to learning an investment strategy completely foreign to them. Most boomers already own a portfolio of securities so all they have to do is start selling the options and watch all that cash roll in…right? Well, it’s not quite that easy but you get the idea as to why covered call writing is so appealing to many boomers.
In my seminars (I’m a boomer so this is appropriate) I frequently show a slide as to why I use covered call writing as the main strategy in the stock portion of my portfolio:
1- High rate of return/low risk
2- Great strategy for moderately bullish, bearish and neutral markets
3- Teach your children; help your parents
4- Control results through exit strategies
5- Downside protection
6- Compound your $ in minutes! (Premiums are in your account immediately and available to re-invest)
7- Capture all corporate dividends (as the shareholders)
8- Cash-generating business in home-office
9- Government-approved for self-directed IRAs
Whenever I display this slide I will follow it up with another showing the disadvantages:
1- Can lose money if share price declines below the breakeven (stock price – option premium)
2- Profit potential is limited by the strike price
3- Shares can be sold early/may miss out on corporate dividends
4- There is a learning curve and time commitment
In my view, the advantages far outweigh the disadvantages but that’s a conclusion each individual investor must make for him (her) self.
Options trading in general and covered call writing in particular has been gaining in popularity over the past decade mainly due to the interest by baby boomers. These retail investors are looking for ways to exit the work force and make up for losses incurred in 2008 from the collapse of the real estate and stock markets. Many of these boomers view covered call writing as a means of accomplishing these goals.
My next live seminar:
September 24th: Philadelphia, Pennsylvania
American Association of Individual Investors
With the recent market volatility, this site is taking a short-term more conservative approach to its covered call writing positions but remains long-term bullish on the markets. This week’s economic reports:
- According to the US Labor Department, the Producer Price Index (PPI) was flat in July compared to a 0.8% rise in June
- Industrial production was unchanged in July compared to a 0.2% increase in June
- Retail sales were up 0.2% in July, lower than expected
- Non-farm business productivity rose by 0.9% in the 2nd quarter which bodes well for more hiring in the near future
- Initial jobless claims for the week ending August 10th came in at 320,000, lower than the 335,000 anticipated
- Housing starts rose by 5.9% in July, a 20.9% increase from a year ago
- Core retail sales were up 0.5%, the largest gain since December
- The CPI (Consumer Price Index) increased by a slight 0.2%, lower than the 0.5% rise in July showing that inflation remains in check
- Business inventories were unchanged in June muting the possibility of an upward revision in 2nd quarter GDP growth
For the week, the S&P 500 declined by 2% for a year-to-date return of 18%, including dividends.
IBD: Market in correction
BCI: Cautiously bullish selling an equal number of in-the-money and out-of-the-money strikes
We are having a great time in San Francisco and will catch up with emails next week on our return to NY.
Wishing you the best in investing,