Most investors who trade calls sell them well out of the money because of a morbid fear of “losing” a profit. A profit not yet on the table, a profit that may not ever be there. This is the worst possible approach. Think about it – you, the investor, spend time and effort and capital to invest in a stock. And then you sit and watch and wait – or you sell a call way out of the money due to a fear of foregone profit.
Change it up. Instead of something way out of the money, sell the Next Call – the very next strike price resting above the current share price. Then close your eyes, and have no worries about being called you. And if you are, you buy back the shares and sell that Next Call once again.
Pick a stock, any stock – one that is undervalued and out of favor, General Motors (GM) worth $50-$54 and sell for $34, a trailing P/e of four, a forward P/E of 5, implying a 25% growth in profitability and selling at one third the market multiple. With the stock at $34.40, if you sell the $34 call, you net $.44 or $44 a contract. Do this fifty times a year and you net $22 on a $34 capital base.
And if you get called out, and you buy it at $34, and you moan and groan about losing that dollar in profit. Of course, you also sell the Next Call and generate another $.44. A week later, another $.44 and so on. At the end of a year you own the shares at $12 a share. And sell it for the original price of $34.