≈ Cap your Upside, Partially Protect your downside ≈
One of the weapons mentioned in our previous Tackle Today message on fighting the earnings dragon was the short call. Let’s pick up on that theme.
The upside to selling calls against your stock position is you get paid a premium. That cash acts as a partial buffer to losses in the stock if prices fall post-earnings. If you want more protection, then sell a closer-the-money call with a higher premium.
There is a tradeoff to acquiring protection, however. You limit your profit potential. If you find that distasteful, then remember, you control where you cap the gain based on the strike price you sell. Say you have a $100 stock, for instance. You can either sell the $105 call for $3 or the $110 call for $1.50. The first one offers $3 of protection but obligates you to sell the stock at $105. The second provides $1.50 of protection while allowing you to profit up to $110.
Here’s our suggestion. Don’t set yourself to be disappointed if you hit your call strike. Run the numbers on what the max gain will be on the overall position and make sure you’re satisfied.
Chart of the Day
Covered Call Risk Graph
What gives you cash flow, mild downside protection, a higher probability of profit, and reduced position volatility? A covered call.
Video of the Day
The Basics of Covered Calls
Coach Greg teaches the basics of Covered Calls in this webinar replay.
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