Weekly Covered Calls are one of the most consistent growth investment strategies out there, with average expected returns of between 8-12% annually.
However, almost no one associates Covered Calls with explosive growth potential... and they’re wrong.
With Weekly Options and a slight variation in how Covered Calls are traded, this ho-hum strategy can turn a $5,000 account into $100,000 in a few short years.
Don’t get me wrong, there are risks associated with all Covered Calls strategies.
If the stock market crashes, my Covered Call positions will lose money, but they will lose a fraction of the normal risks associated with typical Covered Call approaches.
If the stock market is neutral to bullish, or even slightly bearish, this Covered Call approach can do very well.
The key is to limit the risk while capturing the essence of what the Covered Call strategy is trying to do.
But, what is this Covered Calls approach trying to achieve?
Capture time decay in options.
For example, let’s say that I’m long 100 shares of MRVL from $18.50 and short 1 February 22nd 18.50 call from 0.70.
If by February 22nd MRVL goes nowhere, or moves higher, I will have made 3.7% on my investment in just over 3-weeks.
If MRVL drops to 17.80, I will lost 0.70 on my long stock investment and make 0.70 on my option for a breakeven trade.
In other words, MRVL can drop by 3.7% over the next three weeks before I start to lose any money on this trade.
Covered Calls are attractive because they allow you to have a decent return and provide a buffer on the downside.
However, a problem will occur if MRVL tanks to $10.
I could lose $750 on this trade, so I have a significant risk in a big move down.
Now, let’s talk about risk.
Where do the risks lie in Covered Calls?
With a significant drop in the underlying stock.
The simple solution is to replace the long stock position with something else that achieves the basic principle of capturing time decay from the calls, while also limiting the risks at the same time.
The replacement is to simply buy an ITM call that has a small amount of time value to replace the long stock position.
Let’s say that I’m long 1 February 22nd 16.00 call from 2.75 and short 1 February 22nd 18.50 call from 0.70 for a debit of 2.05.
If by February 22nd MRVL goes nowhere or moves higher, I will have made $45, or 22% on my max risk of $205 in just over 3-weeks.
That comes to an annualized return of 374%.
Now, that’s certainly closer to explosive growth in the account, but in order to realize that kind of return, you have to go all in.
If I had $20,000 and wanted a 22% return on that account, I would have to place about 97 Call Spreads.
No one in their right mind would do that because if MRLV happened to move below 16.00, you would lose the entire $20,000 on one trade.
Don’t discount the benefits you get from the limited risk and lower margin requirements because these attributes are huge and allow you to potentially experience explosive growth in your account.
Trading synthetic Covered Calls with Weekly Options provide the best reward metrics, increase potential probability of success, and decrease overall risk.