The Penn Financial Group's Covered Call Strategy

Have you considered bringing in extra income each month and lowering the cost basis of your long-term holdings with the use of options? If so, the PFG Covered Call Strategy could be a great fit for your portfolio in this volatile market environment.

The PFG Covered Call Strategy is available for clients that range from conservative to aggressive as each option is covered by owning the underlying stock. We realize that when you hear the term options the first thought is “risky” or “aggressive”. That could be the case, but with the PFG Covered Call Strategy we strive to ultimately protect our new and existing positions and will create income in the process.

The PFG Covered Call Strategy begins with the purchase a stock that is viewed as a long-term investment based on both fundamental and technical analysis. The next step involves looking at the available front-month options available on the stock. Once a call option is chosen, the appropriate amount of contracts is sold to match the number of shares of the stock. For example if 500 shares of ABC are owned, 5 contracts will be sold. (1 option contract is equal to 100 shares of stock) The covered call position is now established.

In the end the investor holds a long position in a stock and sells a call option against the position. This strategy will help lower the cost basis of your position by the amount of the premium you sold the call for and also generate income for the account. The investors is lowering the cost basis of their position and gaining protection on the downside and at the same time giving up big gains on the upside. It may sound like a win-win situation but there are some risks as there is with EVERY investment. The biggest risk is that the stock price falls below the new adjusted cost basis.

For example, if we buy ABC stock at $50 and sell a call for $5, it moves the cost basis down to $45. If the stock falls to $45 by the third Friday of November, we are break-even in the position. But if ABC falls to $40, we are now down $5 in November. However, this is better than being down $10 if we did not sell the call option. The other risk occurs if the stock moves rapidly in the other direction. When the stock rises above the strike price of the call, the investor will not participate in the big rally and will be limited to the strike price. In the example above, the November call option had a strike price of $55. Therefore if the stock rallies to $70, the investor will not participate in any gains above the $55 strike price. While this is a risk, it is not the worst thing to be "called out" of the position because the investor will lock-in a sizable gain in one month and the cash will be available to initiate a new covered call position.

For a more detailed look at the PFG Covered Call Strategy please watch the video clips below or feel free to contact PFG at info@pennfinancialgroup.com or 1-877-383-7366.