Selling Covered calls as an exit strategy.

Finance Articles | April 12, 2009

Is using the covered call as an exit strategy a good idea? Well there are good parts and bad parts about it.

Selling covered calls is a great way to make money in the stock market. But as an exit strategy it has it’s ups and downs.

First let’s look at the benefits of selling covered calls as an exit strategy.

1. It allows you to make consistent cash flow

If you are constantly selling covered calls on your stock you are constantly bringing in an income off of those calls. This allows you to bring in a somewhat consistent cash flow from the stock market, which is unheard of with most strategies.

2. It takes the pressure off when to sell.

If you allow yourself to get called out of a stock instead of deciding when to sell it definitely takes away all of the pressure of finding the best point.

However there are some disadvantages to selling covered calls as an exit strategy.

1. Limited returns

For one thing there is a limit on how much you can make by selling a call. If you sell a call you will make the same amount of money by having the stock come up and barely hit your target as if you would if the stock makes a huge 30% move in 1 month.

Of course if you are doing this strategy you have to get around the fact that you will potentially miss out on some big profits. Instead you would be shooting for nice steady consistent income.

2. Losses

Using covered calls as your exit strategy has 1 major disadvantage, loss. If the stock goes down 40 or 50% it probably will not matter how much you made by selling the option, which is why if you are selling covered calls it is probably still a good idea to have some sort of a stop on the stock and the option.

For more on covered calls visit http://www.stocks-simplified.com/covered_calls.html

For some stock tips visit http://www.stocks-simplified.com/stock_tips.html

Article Tags: Selling Covered Calls, Selling Covered, Covered Calls, Exit Strategy

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ABOUT THE AUTHOR

When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site http://www.stocks-simplified.com to help others learn.