Weekend Strategy

Sometimes purchases can become sales. But make sure you understand when a sell is a sell. When you sell, you have cash. If you hold a long position and someone tells you to be cautious, selling a covered call is not the same as selling your position. Someone recommending you to sell a call against a long stock or sell a put against a short stock position has not really told you to sell anything. Instead, your trade is not hedged slightly and you are looking to add income. Your risk, however, is often still quite high.

For example, look at IBM (IBM). Selling covered calls into the earnings announcement, like the April $210 calls would have only shielded you about $2.65 out of this $16.90 drop today. That is very different from selling. That's not even very good for hedging. Covered calls are about income and limiting participation. In my experience, they are over utilized, often in the wrong spots and on the wrong securities. They are often touted as hedges or alternatives to selling, but anyone recommending this approach and referring to it as an implementation of caution is mistaken. A sale is a sale. You either sell the security or buy puts, which gives you the right to sell the security at a specific price. The recommendation for selling covered calls is still a bullish view, plain and simple....289 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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