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How You Can Limit Risk ~ And Leave Your Upside Open

Question:
How do I get real, reliable growth and income from my stocks without risking a devastating loss?
Answer:
By using a proven strategy for actually controlling losses in the single digits...while letting your winners run.

Many investors have looked to the strategy of "covered call selling" for income. If you haven't been hurt by this one yet, good for you. But bookmark this page…the law of averages says you'll be back.

There's nothing wrong with selling calls against your stock for income except the fact that by itself, covered call writing (selling) is an incomplete strategy. A covered call sold against stock doesn't protect the stock from losing value; the only thing that is "covered" is the call buyer's position. This is not to the call seller's (your) advantage.


The TWO Biggest Problems with Selling Covered Calls
One glaring flaw of the "covered call" strategy is that it does NOT cover you against loss beyond the initial premium received. Covered call selling actually limits the amount that an investor can gain, while it retains all the risk of a slide in the stock.

Think about it…in the covered call strategy, you only really do well if your stock stays flat. And flat stocks don't carry big premiums so you really don't do well trading those either. In case you do trade an issue that has the kind of volatility that makes covered call writing attractive, here are two scenarios in which you might lose:

  1. You own 100 shares of XYZ, currently trading at $50.00. You have $5,000 AT RISK. For income, let's say you sell a call at the $50 strike price, a month or two out for $1.50. This gives you a net income to the account of $150 less commissions.

    Next..! XYZ shoots through the roof and goes to $100 a share…but you are obligated because of the short call to sell at $50 a share. Net gain if you bought your stock for $50 and sold a covered call: $150. This is a 3% gain for a $5,000 investment…that actually should have DOUBLED your invested dollars (100% gain). Ouch.

  2. You own 100 shares of ABC, currently trading at $50.00 You have $5,000 AT RISK. For income, let's say you sell a call at the $50 strike price, a month or two out for $1.50. This gives you a net income to the account of $150 less commissions.

    After trading hours, ABC comes out with news that it didn't get FDA approval. Didn't meet earnings expectations. Had "accounting discrepancies". Didn't get the big contract. Had SOME unexpected problem…fill in the blank. At the market open, ABC is valued at $25 and is going down HARD from there. All the institutional investors are forming a line to sell and you're at the end. Result? At least a 50% loss, offset by a meager 3% gain from selling a covered call above. Super-Ouch.
In the second scenario above, you would have lost your ENTIRE account, or could even end up OWING money if you were trading on margin. I know this from personal experience…I was following an Internet guru's advice to the letter and ended up seeing all my savings dissolve within 15 minutes of the opening bell.

Covered call selling is touted as one of the best ways to make money in the stock market, and yet it's only half (or less than half) of a complete plan. When you think about it, covered call selling is actually an efficient sorting machine…a mathematical algorithm that takes the winners OUT of your account, and places them in the hands of call buyers…while leaving you with the losers to deal with.

Wanna hear something scary? A good friend of mine runs a company that helps folks search the universe of stocks and options for the best trading candidates. He supports all kinds of option strategies, but out of the more than 120,000 investors who have tried the tools, the majority of them are using covered calls…and MOST of them report having successfully sorted all the winning stocks OUT of their accounts and being stuck with losers…an inevitable effect of consistently trading traditional covered calls.

If only there were a way to do the exact OPPOSITE of this process…to guarantee that a stock's sell price could never go below a certain amount, but also "leave the lid off" - that is, ALLOW the stock to grow and even take income without obligating ourselves to sell…

What if you could have a profit/loss for your investments that looked like this?

               


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