Mark,

I will be retiring in 2 years, I will have a cash out of benefits in the area of $80,000. I want to learn as much as I can about writing covered calls and do it to make a living after I retire.

What would be the best way to learn about writing covered calls?

What would be best books to read on this subject?

Where is the best place to learn the basics about choosing the right stocks for option writing?

Where do I get started?

B.S.


Hello B.S.,

Enhancing your investment return by adopting a covered call writing strategy is a sound plan. But, I don't believe you can 'make a living' when your capital base is $80,000. If you were able to earn 25% per year - and that's a very good return - your income would only be $20,000.

There are two good methods for learning about writing covered calls. The better method is to read about the strategy and to be certain you understand the process before diving in with real money. The best book on this topic for investors who are first learning how to use options is (full disclosure: I wrote this book) /The Short Book on Options: A Conservative Strategy for the Buy and Hold Investor/. It begins with the most basic concepts of options, and provides a solid background in understanding options and how they work.

An alternative method for learning how to write covered calls is to open a paper-trading account. Your broker may offer an opportunity for practicing without putting your money at risk.

In addition, if I were you, I'd go to 888options.com. They provide free information and you can read about various strategies, including covered call writing (http://www.888options.com/strategy/covered_call.jsp).

Choosing stocks. Now that's the important part of the whole operation, and I'm glad you realize its value. You choose stocks for writing covered calls in (almost) the same manner in which you would choose stocks to buy and hold. The only difference is that some stocks have options prices that are so low that the extra money can can earn from writing covered calls is so little, that you would not want to write calls on such stocks.

The success of your covered call writing program is almost totally dependent on how well you pick your stocks. I must admit, that it's not a simple process. Many professionals (mutual fund managers, for example) cannot picks stocks that outperform the major market averages (the S&P 500 or the Dow Jones Industrial Average, for example), and it's not reasonable for the average investor to expect to do much better. Some investors are wildly successful, while others do very poorly. If your track record for choosing stocks is a good one and if you have made good money over the years by owning stocks, then you should just continue using your current methods for stock selection. But, if buying stocks is new to you, or if your performance has been uneven, I have a suggestion. Instead of picking individual stocks, consider writing covered calls on indexes. You can do this by buying shares of ETFs (exchange traded funds), such as SPY, QQQQ, or numerous others. If you do that, you will be owning shares of funds that own a diversified portfolio of stocks. Note: you cannot do this with traditional mutual funds. Many ETFs have listed options, providing an opportunity to write covered calls. The choice is yours - if you go with individual stocks, you may be able to make more money. It all depends on how well you choose your stocks.

Whether you chose individual stocks or ETFs, writing covered calls in an intelligent method for increasing your market performance, with reduced risk of loss.

Best of luck.

Mark