I wasn’t going to post another article in the Bullhunter Blog until I got back home from Hong Kong. However, I put a post in the Planet Wealth Blog about my trading with Collars when Renting Shares. In here, I can easily call it Writing Covered Calls with a Collar.
I have done quite well from this very strategy myself, so here’s a quick mention of it here in the Bullhunter Blog. Many of my readers have enquired about my trading so it is relevant enough to mention here.
Covered Call With A Collar
With the market being so volatile at the moment and especially dropping very fast on occasions, I decided to slightly change my trading strategy. Basically what I do is this:
- I buy shares
- I write covered calls on those shares (renting shares) and receive a monthly premium for that.
- At the same time I buy a Put (insurance) at around 80 – 90% of the share value depending on the cost at the time.
- I personally like to buy a Call option slightly out of the money, approximately 10 – 20% above the price I’m renting them at (the covered calls).
- If the share price drops, I buy back the covered call at a discount (I make a profit) and cash in the Put option (the insurance) at a premium (another profit).
- If the share price goes up, I cash in the bought Call option ( a profit) and if I get exercized on the Covered Call (renting shares), I actually make a profit because I rented them at more than I bought them for.
Before you get put off by the above steps, there is a much easier (and simpler) way to do this. I have covered that further on.
Keep in mind, I have complicated the process a bit here. I have a reasonable understanding of trading on the stock market. There are a few more things I do to increase my profitability, such as doubling up the Put options and working them in favour when the market drops. I also borrow 100% of the share price from the bank, hence I am using no money of my own and profit nicely from it.
Simplify It All For Me Please!
I learned these strategies from Andrew Dimitri at Planet Wealth. If you’d like to attend one of his FREE Webinar Sessions where he explains this startegy ( the much easier version of what I wrote above ), then you can go online and book your spot at Andrew’s Webinar Here For FREE.
FREE Intro Session To Covered Calls With Collars
Andrew Dimitri has offered to put these sessions on the teach you How To Trade Covered Calls With Collars – and it is Free. He shows the simple way of doing it and it can be seen online – at home on your own PC.
I learned strategies like this one from Andrew back in 2004. I’m really grateful I made the effort to do this. Now, this is much easier to learn as he does it for you online. If you would like to check it out, go and book your spot at the next available session:
Book your FREE spot at the webinar here >>
There is only room for 50 people at each session. First in – best dressed.
Last month alone, Planet Wealth made a 12.9% profit on a $70,000 investment bank. In that month the ASX dropped by 11.4% – and they made a profit using this strategy! I use that same strategy and I know it works.
Enjoy the webinar. It is good value.
I’ll see you back here next week for the next installment of the Bullhunters Guide.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2008
{ 7 comments… read them below or add one }
Hi Sean, There’s something wrong with steps 5 and 6 above.
#5 If the share price drops, I buy back the covered call at a discount (I make a profit) and cash in the Put option (the insurance) at a premium (another profit).
- You fail to mention the loss on the shares. You mention you like to write out of the money (OTM) options – typically this would be about 2-3% of the share price however in this volatile market you may get better premiums. If the stock drops, and you say you have bought a put option at strike price of around 80-90%, the worse case scenario is you have to exercise the put option then you would be sitting on a loss of 10%-20% on the shares.
# If the share price goes up, I cash in the bought Call option ( a profit) and if I get exercized on the Covered Call (renting shares), I actually make a profit because I rented them at more than I bought them for.
- do you mean you cash in the bought put option? It wouldn’t be at a profit as put options only go up in value when the stock goes down in price.
Thanks Sean,
hope you can clarify these things.
Daniel.
Hi Daniel
Your point is valid. I did mention that I do more than this, such as ‘doubling up on the Put options’. This enables me to be covered against the share price drop (no loss on the shareprice) AND make a profit on the other Put Options.
When the share price goes “up”, I cash in the ‘Bought’ Call Option (it goes up in price when the share price rises = profit). I also get exercized on the ‘Sold’ Call Option (the covered call) IF the share price is above the strike price on expirydate.
Also keep in mind, I do this with a share that I am very familiar with i.e. the price ranges and channels are fairly predictable. 90% of the time I seem to get it right. I have not, to date, been exercized on this share.
When the share price drops, I cash in the PUT, normally the price turns and goes up again. The same normally happens when the price goes up: it turns at a certain level.
I use the Volume, RSI, C-Stats & Stochastic + watch the bollinger bands to see if the share price is likely to turn.
This strategy can go wrong, like any other, but I have found a system that really works for me and stick to it.
l keep all your emails.
l am new to trading. l have been made redundant. Had to sell my apartment so have some cash to buy in.
Looking at covered calls. Doing virtual trading at the moment & seeing 5% returns a month! lf it is that easy why isnt everyone doing it?!
Can you tell me the pitfalls of covered calls?
Would really appreciate some advice.
Karen shakespeare
Hi Karen
As long as you protect your shares (ie buy puts) you can not lose with writing covered calls. Just make sure you sell the call for more than you buy the put. It is slow but with the effects of compounding before long your base capital has more than quadrupled in 5yrs!! and that is fair dinkum
Cheers Dan
Hi Sean,
Okay this is a little out of my league yet. I still have a lot more learning to do. I understand what you’re saying in this process of writing covered calls with collars.
But, if you asked me to go and buys shares and apply it; I’d be lost. I’ll keep reading.
Sean, spelling error
Paragraph: Simplify It All For Me Please!
Second line down: where he explains this startegy (s/b strategy)
This sounds like a good strategy. I do covered calls now so I will have a look at it and see if I can implement it tomorrow for next weeks trading.
Thank you