Prosper Newsletter: April 2007 > Stock
You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.
Covered Calls
Buying stocks and selling a call against the stock that you own is called covered calls. You are covered because you actually own the stock that you are selling. If you were to sell a call against stock that you didn't own, it would be an uncovered call and you would be at great risk.
Covered calls, however, are a conservative and safe strategy. It is relatively hard to lose money on covered calls unless you're doing it wrong. The government will also let you trade the calls as an IRA account.
There are three steps involved in covering a call. The first is buying the stock, the second is selling the call, and the third is referred to as buying the foot.
In order to buy the stock, you need to buy 500 to 1000 shares of the stock, and have the price to be just below a strike price.
Choose the bid price and current month option when selling the call. Sell the same number of contracts as the shares that you own. If you own a thousand shares of stock, you will need to sell ten contracts. The money that you receive from selling the call is referred to as a premium, and that money goes back into your account the very next day and is yours to keep regardless of what happens next. The downside is you will not have access to that money until the call that you just sold expires. If the stock happens to go up before the expiration date, then you would be called out of the stock and the stock would go to whoever called you out. This is all automatic and done for you, and you would receive back exactly what you paid for it, plus the premium that you received from the call.
If the stock remains at the same price when the expiration date arrives, you will not be called out of the stock. You will keep the stock as well as the premium. Now you are free to sell the stock, or sell another covered call for the next month.
If the stock goes down by the expiration date, you will be required to buy the foot, which is like an insurance policy. You are, in essence, insuring yourself in case your stock crashes. You would go back into the buying stock option and buy the foot as well. The cost of this insurance comes from the premium that you have already received. If the stock value continues to go down, the value of the foot will continue to rise.
Double Previous Income
I enrolled in this program almost immediately upon leaving a job I had held for over 21 years. For a long time, stock market education had been calling to me, so I jumped at the chance to start an entirely new career, and this one from my home so that I could spend more time with my young children. Wow! Was I ever amazed at all the information I learned about the stock market, generally, and options in particular. I knew many people make a lot of money through stock market trading, but never imagined I would have access to the same avenues as they. Initially, I wanted to make enough money to pay the bills as if I were still working at my former job (over $115,000 annual salary). Now, I anticipate doubling that income, at the least, and going up from there. My coach, through his thorough explanations of the material covered and in responding to my questions, has given me great belief that we all have options for our future, if we will just look for them. There is help (training, such as with this system) available if we will let go of our fears and insecurities and give ourselves a chance, rather than just accepting our situations as they are. Personally, I have friends who are miserable at work, but don't how to make a job/life change while paying the bills. I tell them all that they should contact you to find out how they can solve that dilemma. In a nutshell, I'm just so excited to have been involved in this training program and am eager to reap the benefits of following the guidelines I've been given. My coach is just the best--a great teacher who made me feel at ease and if no question was a dumb one. He's bound to make a lot of students very happy.
- Crystal F.
The past few weeks have been an interesting time in the market. We have seen a correction and a lot of volatility come into the market. We are really impressed with the DOW being able to hold the 12,000-dollar level. Each time it approached or dipped below it would fight right back and close well above the mark. As far as the coming weeks are concerned we will probably see more of the same, a lot of ups and downs in the market. Earnings season is just a few weeks away in the early part of April. Earnings will give us a bit more direction in the market. The early indications from the large financial companies are that we should be seeing a good earnings season. If this is the case we will see more upside in the market. Keep a close eye in the indicators right now, if the market starts to take off again there will be a lot of great buying opportunities.
The most popular sector in the market is 'trucks and other vehicles'. This took some digging to find out why. There is a new military vehicle that can withstand the roadside bombs in Iraq. It has blow out proof tires and a v-shaped undercarriage that will direct the force of the bomb out and around the vehicle. Since the military has put these into action there has not been one soldier killed who has been riding in one of these vehicles. With these types of results the government has ordered several thousand more. We recommend that you keep an eye on this sector; it has been on the move for some time.
