Covered Call Strategy

My preferred strategies for covered calls are as follows:
1) Use them to generate income against very long-term positions. I may sell calls against half a position to squeeze some extra juice out of a holding.
2) Use them to generate income on stalwart stocks. These are stocks that are core positions in your portfolio that are world-class brand names that will never go out of business. This is stuff like ExxonMobil (NYSE:XOM) or Coca-Cola (NYSE:KO). You can generate 2% – 2.5% returns monthly with this strategy. If the stock is called away, repurchase it and sell the calls again. If not, just sell the calls on the stock next month. The idea is that you will never get stuck with a loss because the company will eventually recover its price over the long term.
3) Use them when holding a value stock. In this case, you can go for the more aggressive premiums because your analysis shows that the stock itself is vastly undervalued. In theory, you can collect these nice premiums because downside risk is limited. I’ve mentioned First Cash Financial Services (NASDAQ:FCFS) and EZCORP (NASDAQ:EZPW) as two selections that I have done this with over several years.

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