Born To Sell Seller's Paradise 
Jul 1, 2015 
In The Money Covered Calls

One of the reasons covered calls are popular is because they provide an element of downside protection. The premium you receive when you sell the call option against your stock absorbs some or all of any drop in the underlying stock. How much protection you have depends on how far in the money your strike price is.

On a day like Monday when the market drops 350 points, you will be very happy that you had some form of downside protection. Although your short calls may not have absorbed all of the loss, chances are they absorbed at least some of it.

If you're worried about the Greece referendum vote, and/or what happens after that, there are really 2 basic choices: (1) Sell your stocks and move to cash, or (2) Buy put options as insurance, or (3) Sell in-the-money calls against your stocks to protect them from some or all of any drop.

Option 1 (sell stocks, move to cash) will probably let you sleep a lot better, knowing that you don't have to wake up to a market that has gapped down overnight or over this coming weekend. But if your stocks are in a taxable account and have gains then selling them will trigger a tax liability, so be aware of that.

Option 2 (buy puts) gives you absolute certainty that your stocks won't fall below a certain value (the strike price of the puts you buy) but, like all insurance, there is a cost (the price of the put). If your stock drops below the put's strike and you don't want to sell the stock (for tax reasons or whatever) then you can just sell the ITM put option instead of exercising it.

Option 3 (sell in the money covered calls) is not as iron-clad as (1) or (2) but has the benefit that you get some downside protection while at the same time could earn a little something (the time premium portion of the option you sold). It's not for everyone but in general, conservative investors may feel more comfortable by selling some ITM covered calls during times of uncertainty like we have over the next couple of weeks (and perhaps longer).

No matter what you do this week, you probably should do something to hedge against European risk in the near term. See our article on 5 Different Downside Protection Methods or an older article on Option Hedging With Covered Calls.

Top 10 Dow Dividend Stocks

InvestorPlace logoInvestorPlace published a list of the top 10 Dow dividend stocks earlier this week. They pointed out that the yield on Treasuries dropped to 2.35%, while all of the top 10 Dow dividend stocks yielded 3.1% or higher (and after Monday's market drop, that's now 3.2%).

Buying blue chips for dividend yield is good but, the combination of covered call premium on top of those dividends makes for an even better blue chip income portfolio. To see some candidate trades to consider, check out our article Top 10 Dow Dividend Stocks For July 2015.

Studies Showing Covered Call Effectiveness

We've always maintained a downloadable list of Covered Call Studies that have been prepared by various academic groups and professional research firms. But recently we came across 2 older reports that we had somehow missed.

The first is from Ibbotson Associates (now a part of Morningstar) that looks at a 16-year period and compares the BXM (buy-write index) to the S&P 500. The results show that the BXM delivered better returns with less volatility than the S&P 500 over the same period. Click here to see the results and read the study.

The second is a Callan Associates report for an 18-year study comparing the BXM to the S&P 500, which also looked at every 5 year period in between (to prevent cherry picking of study dates). Results show that BXM underperformed the S&P 500 during the run-up in equities in the late 1990s (.com bubble), but outperformed the S&P 500 in the downturn that followed. Click here to see the results and read the study.

AAPL And 3 Other Covered Calls For July 17 Expiration

With 2.5 weeks to go until the June options expire, the top 4 covered calls Born To Sell members have written are (in order of popularity):


(Note: Born To Sell members have access to the full Top 10 Covered Call list, as well as having this list update real-time as members change positions. These are not recommendations, they are merely a reflection of our members' current positions.)

AAPL And Other Covered Call Watchlist Stocks

Currently, the top 8 stocks Born To Sell members are using for their Watchlist are (in order of popularity):


(Note: Born To Sell members have access to the full Top 20 Watchlist, as well as having this list update real-time as members change their watchlists. And, you can have the highest yielding covered calls from your personal watchlist emailed to you after the close each day. Never miss a fat premium from your watchlist again!)

Want More Covered Call Goodness?

Born To Sell is dedicated to only one thing: Making Money With Covered Calls. Our subscribers have access to state-of-the-art covered call screeners and covered call portfolio management tools. For less than the profit of a single trade you could be enjoying recurring monthly income using our tools. Three subscription types to choose from:

Quarterly$149.95 (17% discount)
Annual$499.95 (31% discount)

Plus, all subscriptions begin with a no-obligation 2-week free trial. What are you waiting for? Start collecting premium today!

Happy Trading,

The Born To Sell Team

Follow us: Google+ | Facebook | Twitter or watch demos on YouTube