Now that the market has soared 90% off its March 2009 bottom, there aren't as many sure bets.
Which is really a double-edged sword. There's not a plethora of good stock ideas, but several positions in your portfolio have probably appreciated quite nicely.
Leaving you with a tough decision: Do you sell your winners to lock in these gains and forfeit further gains if these experts are wrong? Or do you hold onto these winners, handing back your profits if they're right?
How about something in between?
If neither of those options sounds ideal, you could take advantage of a trade that will pay you money if the stock stagnates or drops, while giving you the opportunity to sell if the stock moves higher.
If this third option sounds intriguing, you might consider writing covered calls.
Though options have the perception of being a risky tool for advanced traders (and there are complicated strategies that fit that bill), they're not quite as arcane as you might think.
In fact, covered calls are a conservative trade
And you don't have to be an "expert" to benefit from them.
Covered calls pay you if the underlying stock stays flat or moves down. In return, you agree to sell the underlying stock if it crosses a specified price.
To write a covered call, you have to own shares of a company. Options contracts are based on 100 underlying shares of a company, so you should only write covered calls on companies you own at least 100 shares of.
Then, you'll write a call option on this stock.
Let's say you own 100 shares of Microsoft. You bought the shares near the market bottom, so your position has almost doubled. But now you're worried that Google's apps are eating into Microsoft's core franchise, so you'd be happy to sell your Microsoft position for $25 per share.
You could write August $25 calls, which currently would net you about $51 before commissions.
If the stock is trading below $25 on the expiration date, that $51 premium is yours to keep -- pure profit -- and you can write yet another call option. If the stock is trading at or above $25 per share, you will sell your stocks for $25 to the option buyer, and your total sales price is now $2,551 before commissions, since that $51 premium is yours to keep no matter what.
This is just an example -- it's not a trade I'm recommending, but it illustrates how writing a covered call works.
If you are interested in a few recommendations
Here are a few stable large-cap companies that it could make sense to write covered calls on if you owned shares over the past year, based on both trailing returns and its current multiples.
As you can see, all the companies are large caps, which provides them some stability. And their stocks have had pretty significant upticks over the past year. If the market drops, gains made in these positions could quickly vanish, which is why a covered call strategy could make sense for investors who still want to hold these stocks but are worried about a potential downturn.
Market Cap (in billions)
|Caterpillar (NYSE: CAT )||50%||$62.0|
|Qualcomm (Nasdaq: QCOM )||51%||$89.0|
|UnitedHealth Group (NYSE: UNH )||60%||$54.5|
|Halliburton (NYSE: HAL )||77%||$42.0|
|Moody's (NYSE: MCO )||87%||$8.1|
Source: Capital IQ, a division of Standard & Poor's.
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