InSight

Income and Risk Management from Covered Calls

Financial Planning Dentist

A covered call strategy is a popular options trading strategy that combines both risk management and income generation using stocks. It involves selling call options on a stock you already own, thereby generating additional income while potentially limiting downside risk.

Here’s a basic description of a covered call strategy:

You need to own the Stock: To implement a covered call strategy, you first need to own the underlying stock. This means you have purchased shares of a particular stock in your investment portfolio. A call can be written against each “round lot” or 100 shares.

Selling Call Options: Once you own the stock, you sell call options against it. A call option is a financial contract that gives the buyer the right, but not the obligation, to buy the underlying stock at a specified price (known as the strike price) within a specified time period (known as the expiration date). By selling call options, you are essentially giving someone else the opportunity to buy your stock at the strike price if they choose to exercise the option.

Generating Income: When you sell a call option, you receive a premium (payment) from the buyer of the option. This premium becomes your additional income. It’s important to note that by selling the call option, you are obligated to sell the stock at the strike price if the buyer decides to exercise the option.

Risk Management: The covered call strategy helps manage risk in two ways. First, the premium received from selling the call options provides a buffer against potential stock price declines. It reduces the effective cost basis of the stock, thereby providing some downside protection. Second, if the stock price rises above the strike price, you are obligated to sell the stock at the strike price, but you still get to keep the premium received. While you miss out on potential gains above the strike price, you benefit from the additional income generated.

Potential Outcomes: There are a few potential outcomes with a covered call strategy. If the stock price remains below the strike price, the call options will typically expire worthless, and you get to keep the premium as income. If the stock price rises above the strike price and the call options are exercised, you sell your stock at the strike price and still retain the premium received. If the stock price experiences a significant increase, you may miss out on potential gains above the strike price.

In summary, a covered call strategy is a risk management tool and a way to generate additional income from stock. It involves selling call options on a stock you own, providing downside protection and potential income. While it limits potential gains if the stock price rises significantly, it can be a useful strategy for investors looking to manage risk and generate income from their stock holdings.

More related articles:

mindfulness
Articles
Kevin Taylor

Meditation, Mindfulness and Money: 4 ways to channel mindfulness into your money

If you’re looking for some broader answers to the ‘universal question’ I’m not your guy and this is not that article. But I will say that after years of thinking the transcendental was not for me, I’ve changed. If it was real, here and now, I would investigate it for legitimacy. If it was ethereal and spiritual it was for guru’s, theologians, monks and priests. But that has changed for me. I now see mindfulness as a tool that has a very real way of actualizing my intentions, and meditation is the gateway to getting in touch with that.  The deliberate focusing of your mind is no more than coaching it to react in a particular way. Drawing from techniques that are metaphysical (more controllable) and shaping the physical (less controllable). So, to cut through the chaos of daily life, and getting your mind thinking about money, or more broadly wealth is no more difficult than coaching it to think more deeply about your family, career, or your other passions.  Visualize your financial goals Players and coaches have for decades now taught visualization as a method for success. Mindfulness allows the player to be mentally prepared for a situation, before they are called on to act in that moment. To see their options and take advantage of opportunity by running through a situation and potential variables. This speeds up decision making ability and allows people to react faster and with a better sense of how a decision reflects the hope of a game plan. They do this to focus the mind on their desired outcome, before the situation arises. Visualization can similarly help you premeditate the outcome you’re seeking for you and your family’s financial future. It is rarely a lack of opportunity that hinders success, but a failure of recognizing that opportunity in the moment it exposes itself. Having coached your mind to see and react to risk and opportunity is something that you mind can be coached into understanding before the opportunity presents itself. Get real about your finances By taking time to reflect and gain comfortability with your financial situation you can become more intimate and realistic with your expectations. By carving out time to reflect on your situation, the calmness of the moment can help you define more achievable outcomes. This is not to say you shouldn’t expect an extravagant life, but to help you control the resources at your disposal and become capable of mastering the decision making process in front of you.  Through meditation you can calm down otherwise erratic parts of life and focus your mind with greater intention. You can isolate the parts about your financial life that bring you joy and contentment and ready your mind to make decisions that have often been the result of emotion or reaction. Deliberately bringing your mind into focus brings clarity to the more important aspects of your life. Mindfulness about your past Meditation can be used to deliberately shape the way you react to a situation. Using mindfulness it can also be used to relive and relearn from events in your past. Taking time to re-feel how a situation in your past affected your present is a way of coaching your mind to learn from those events. By using the emotions which drive so much of our decision making and combining that with the more deliberative parts of the brain, you can combine the events of your past into the reactions you hope are part of your present.  Imagine if you isolate a single event from your past that shaped your current relationship with money. Reflecting through meditation the events that have caused your current understanding of your financial situation and the history you associate with the subject. You can then reimagine the events and outcome from your past. Learn from that very visceral event, and reshape how you would have rather reacted. The goal is not to relive financial missteps that you cannot get back, but to coach your emotional reptilian brain to cede the lead to your primate and more deliberative brain. By reflecting on the emotional drivers in a meditative process you can recognize the leading indicators events and avoid them in your current situation. Discover your money beliefs though mindfulness By channeling meditation time towards your money habits you can have a more complete and intimate relationship with money. Meditation helps you uncover the person you want to be in life, to shape and imagine how that person thinks and reacts to help define what that person’s intentions about money are. We all hold certain money beliefs, usually as a reaction to our emotions with money and lifestyle. One you begin spending even small amounts of time focusing your mind on money and your relationship with it, you’ll find the beliefs you have about money change. Channeling a deliberate intention into your beliefs will develop more positive money reactions, and those reactions will evolve in habits. This process enshrines the positive money outcomes you desire, into tactical decisions you can control. For many this transformation can happen in the way they save which is one of the leading indicators to financial success. They can transform the way they think and transform the way cash flows through their household flow from “income – spend = save” to “income – save = spend.” This shift in the belief that saving is more pressing then spending is not the natural state for most people, until they gain that more intimate and purposeful mindset around the value of saving. Conclusion Becoming more purposeful with your actions and ultimately your money begins with mindfulness. This mindfulness can be the result of focused meditation on the subject. Reshaping to the way you feel about and react to investment situations, market performance, and risk. Finding time to be deliberative about money allows you to cultivate your reaction to your money and better develop the fiscal life you want.  

Read More »
Boulder Financial Planning, Financial Expertise
Articles
Peter Locke

What is an Estate Plan?

Estate planning is one of the most skipped parts of peoples’ financial lives. Whether you’ve put it off because you didn’t know anything about it, it’s boring, expensive, or because you don’t think you have enough assets, I hope this guide will help you understand why you need a plan, common terms, and how to get started. What is an Estate Plan? Your estate is everything you own. It ranges from your business, house, money, and any other personal belongings. Even if you don’t own a lot of stuff, you still need a plan for where all of these things will go. However, your estate plan is more than just a map of where all your possessions will go. It helps dictate where your kids will go, who will take care of you if you’re unable to, who will handle all your affairs if you can’t, who will take your loved pets, etc. It’s a combination of how to pass down assets, to how the end of your life will be managed, and who will handle everything. Documents Included In An Estate Plan Everyone’s estate plan is slightly different, but there are a few specific documents that most have in common. Last Will & Testament – The goal of a will is to lay out your wishes for who will receive what after you pass away. Designation of Guardianship – This document designates who will look after and care for your children in the event you’re unable to. Living Trust – Very similar to a will where you outline the instructions of who gets what. The difference with a trust is that these assets are placed in there while you are still alive. Once you pass away, these assets will be moved without needing probate. Living Will – This document focuses on your preferences concerning medical treatment if you develop a terminal illness or injury that causes you to lose brain activity. Includes things like, feeding tube, assisted breathing, resuscitation, etc. It may also outline your religious or philosophical beliefs and how you would like your life to end. A living will is only valid if you are unable to communicate your wishes Financial Power Of Attorney* – The financial POA is a document that allows an individual to manage your business and financial affairs, such as signing checks, filing tax returns, and managing investment accounts when and if the latter becomes unable to understand or make decisions. Healthcare Power of Attorney* – Designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. *Power of Attorney’s can be divided into several different categories. General power POA (gives the agent the power to act on behalf of any matters), Limited POA (gives the agent the power to act on behalf of specific matters or events for a specific amount of time) and Durable POA (remains in control of certain legal, property, or financial matters specifically spelled out in the agreement, even after the principal becomes mentally incapacitated.). What actually happens to an estate after you die? Most people have no idea what the process looks like after someone passes away. Those that do, typically understand why these documents are so important. So let’s dive into this so you get a real-life understanding. Everything you own at the time of your death is part of your estate. Your estate then goes through probate. Probate is the process where the court decides what happens to your assets now that you are gone. This is where having estate planning documents becomes so helpful. If you have a will, the court uses this as their guide to splitting up your estate. If for some reason you don’t have one, you are considered to have died intestate and the court uses local laws to decide who gets your assets. Honestly, you don’t want them deciding who gets your stuff! Not only that, probate can cost anywhere from 2-5% of the value of your estate so having a will helps ensure everything goes to the right people. The best way to avoid probate is by naming beneficiaries on all your important accounts like life insurance, retirement accounts, transfer on death accounts (investment accounts), Payable on Death (bank accounts), beneficiary deeds (real estate). Who handles your estate? When you create your will, you get to name someone as the executor of your estate. This person manages your estate through the probate process. They handle unpaid bills, taxes, debt, and anything else that relates to your estate. They also help distribute your estate to all the right people. Typically, people pick their kids, spouse, or siblings to do this for them as it is not a quick and easy job. You definitely want someone you trust to be your executor. If you do not name someone before you die, the judge will choose someone as your administrator (usually spouse then parent or next in kin) Taxes On Your Estate Many people worry about estate taxes, but it only really applies to people with significant wealth. In 2023, the first $12.06 million of your estate is exempt from federal taxes. The only way you have taxes is if you have more wealth than that or if you live in one of the 12 states that have a state estate tax. These states are: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington. Some of these states have a lower exemption than the federal one so you may have to pay state tax even if none is due federally. You definitely want to be aware of this and plan for it! Your executor is the one who will help handle all the tax bills that could be due. They will use money in the estate to help pay these bills and if they need to liquidate to help pay for taxes, they will. When Do I Need A Trust? Most people have heard

Read More »
New
Kevin Taylor

The Future of Compute: Navigating Through Bottlenecks to New Horizons

The relentless march of technological advancement continues to redefine the landscape of computing. As we push the boundaries of what’s possible, the future of compute looks both promising and challenging. Central to this journey are the bottlenecks that currently limit our progress and the innovative strategies companies are employing to overcome these hurdles. This post explores these critical challenges and highlights how leading firms are paving the way for a new era of computing capabilities. Current Bottlenecks in Computing 1. Moore’s Law Slowing Down: For decades, Moore’s Law has predicted the doubling of transistors on a microchip approximately every two years, leading to continuous performance enhancements. However, as we approach the physical limitations of silicon-based chips, this pace has significantly slowed, posing a fundamental bottleneck to computational power growth. 2. Energy Efficiency: As computational power increases, so does energy consumption. Data centers worldwide are already consuming an immense amount of electricity, leading to concerns over sustainability and operational costs. 3. Heat Dissipation: High-performance computing generates substantial heat, which needs to be efficiently dissipated to prevent overheating and ensure system stability. Traditional cooling solutions are becoming insufficient for next-generation computing demands. 4. Data Movement Bottlenecks: As data sets grow exponentially, the bandwidth required to move data between storage and processors has become a critical bottleneck. This limitation affects everything from cloud computing to machine learning applications. Overcoming Limitations: Strategies from Leading Companies To address these challenges, companies across the globe are investing in research and development to find innovative solutions. Here are some of the strategies being employed: 1. Embracing New Materials and Architectures: Companies like IBM and Intel are exploring beyond traditional silicon to materials like graphene and carbon nanotubes, which could potentially offer superior electrical properties. Additionally, new chip architectures, such as 3D stacking and chiplets, are being developed to enhance connectivity and reduce latency. 2. Advancing Quantum Computing: Google, IBM, and startups like Rigetti are heavily investing in quantum computing, a technology that promises exponential increases in computational power while potentially solving the energy efficiency problem. Quantum computing operates fundamentally differently from classical computing and could bypass many of the limitations we currently face. 3. Innovating in Cooling Technologies: To tackle the heat dissipation challenge, companies like Microsoft have experimented with submerging data centers in the ocean to leverage natural cooling. Others are developing advanced liquid cooling solutions and even exploring the use of materials with higher thermal conductivity for heat management. 4. Reducing Data Movement: New processing paradigms, such as in-memory computing and edge computing, are being developed to bring processing closer to where data is stored or created. This approach reduces the need for data movement, thereby alleviating bandwidth bottlenecks. Companies like Nvidia and Intel are leading the charge in these areas, integrating processing capabilities directly into storage devices and developing specialized hardware for edge computing applications. 5. Enhancing Energy Efficiency: ARM and AMD are focusing on creating more energy-efficient processor designs. These efforts include optimizing software to run more efficiently on existing hardware and developing processors that can deliver higher performance per watt. Looking Ahead The future of computing is not just about overcoming current limitations but also about reimagining what computing can achieve. As we look ahead, the convergence of artificial intelligence, quantum computing, and new materials science will likely be the catalyst for the next wave of technological revolutions. Innovation in computing is as much about the journey as it is about the destination. The challenges we face today are but stepping stones to a future where the full potential of computing can be realized. As companies continue to push the boundaries of what’s possible, we can look forward to a future where the limitations of today are the breakthroughs of tomorrow. The path forward is fraught with challenges, but with every bottleneck overcome, we unlock new possibilities. The future of computing is not just about faster processors and more efficient algorithms; it’s about redefining the very fabric of technology to create a more connected, intelligent, and sustainable world.

Read More »

Pin It on Pinterest