Many people know of someone who believes that investing in the stock market in any capacity is a waste of time. They say things like the market is fixed or the market is for rich people. Some have the view that the market is really another version of Las Vegas, where people just wish and pray for a lucky number.
Generally these individuals have been burned by investing in one way or another. Many have tried to act on a tip that a friend or co-worker gave them. Or sometimes they attempt to buy shares of companies that they are familiar with, without knowing whether this is the right company or the right time to buy. Learning to write covered calls is no different than any other thing you want to learn in life.
You have to practice.
But how do you practice writing covered calls without losing your shirt? You paper trade. Paper trading is where you buy and sell stock as if you were trading with actual money. Many online brokerage firms have a feature that lets you place fictional trades based on the actual moves of the stock market. Don’t have a brokerage account? Many online firms let you open an account with a couple thousand dollars while some will grant you an account with no deposit at all.
Now if you’re not ready to open a trading account, not to worry. You can practice your trades the old fashion way; by writing them down. Just keep a log of all of your entries and exits. Every time you would have bought shares in real life, write that transaction down. Make sure to write down the exact number of shares purchased and the stock price. Do the same every time you sell your paper trades.
Once you are ready to try out writing covered calls, follow this practice for the stocks you buy and for the call options that you sell. Of course it should go without saying that proper research should be done so that you know which stocks to paper trade. By engaging in paper trading, it will help you to decide if your research proves correct. Needless to say you shouldn’t invest real money until you have consistently been profitable with your paper trades.
How consistent you need to be can vary based on what you feel comfortable with. Ideally, you should make money on at least half of your trades. You do have to look at more than just the win/loss record to determine if you are indeed making money. It makes no sense to have six winning trades out of ten if the four losing trades lost more money than you made.
Bottom line, when it comes to writing covered calls and making consistent money… practice makes perfect.
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