Covered Calls For Retirement Income - Part 1

Many fail to get involved in selling stockstackup.com" title="covered calls">covered calls because it deals with options, yet the technique is really fairly simple. The term "Covered" just means that you own the stock you are "writing" a call option on.

In short, this strategy involves buying a stock and then selling someone else the right to buy it from you in the future (an option). The fact that it is a "call" option means that they (the option investor) are hoping the price of the stock will go up (to remember this, you call UP someone, then you put DOWN the phone - so "calls" are UP or Long, and "puts" are DOWN or short).

How does it all work. Do you have to go out and find the buyers for your call options? NO. This is all done for you by the broker. Once you "write" (or sell) the covered call, one of three things can happen:

1) The price of the stock goes up in value, and the buyer exercises his right to buy. In this case, you've pocketed the premium, and you'll most likely be selling the shares at a profit too! You'll then have to find another stock to buy in order to continue the strategy.

2) The stock price remains about the same (it could go up slightly, and the call option would still not be worth executing). In this case, you keep the option premium. Since the buyer won't be willing to pay you less than the option value for the stock, you'll keep the stock, too. You've made about 4% over three months, and you can even sell the right to buy your stock again! Not bad right?

3) The stock falls in value. In this case, the option premium you received helps to offset the loss on the stock. The buyer walks away when the right expires, and you're also free to sell another option.

So if the investment goes up, then we sell it for a gain. If the investment stays the same, then we profit from the option. If the investment drops in value, then the option premium helps offset the loss.

I know that sounds like a can't lose strategy, but there are a couple downfalls you need to avoid that we will cover in Part 2 of this article series.

Doug West has worked in Financial Planning and Investment training for over 20 years. Get his No-Cost Audio Report on how you can Secure Your Retirement with Free-Online Tools:

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Financial Planning For Retirement In India

Retirement is a financial challenge for most in India. What one saves through working life can seem less than adequate for the 'peaceful' years of retirement. Increasing life spans make it critical for people to plan for 25 + years of retirement, inflation continues to erode savings and interest rates continue to moderate as the Indian economy matures. What should you do if you are intent on having a pleasant retirement ?

1. Set your target: It is important to know what amount of money, in today's terms, you would need at your retirement. For example, if you are 35 years of age and think that Rs 25,000 per month (in today's terms) is a good sum for retirement, plan to retire at 65 and hope to live till 80, then you can expect to require close to Rs 1,10,000 every month in the 66th year. This is simply because inflation continues to lower the purchasing power of your money. To get to this number, you should plan to have savings of approximately Rs 2 crores (Rs 20 million) by the time you retire. If you want to maintain your lifestyle, this pool needs to be closer to Rs 4 crores (Rs 40 million) in your 80th year !

2. Start young: Only way to do this is to start young. A typical rule of thumb is to save up to 30% of your gross salary through your working life. Compound interest helps the savings pool grow in a healthy way even as your earning and savings power increase over the course of your career.

3. Create a portfolio: Build a balanced portfolio throughout your life. It should have a good mix of real estate, stocks, mutual funds, bonds, deposits and possibly gold. The riskier assets like stocks and and equity based mutual funds could form larger portion of your portfolio when you are younger (say 70%) and move to a more stable portfolio as you arrive into your 50s (deposits, real estate and bonds forming most of your portfolio). Many people forget to create a portfolio and put all their eggs in one basket - typically real estate !

4. Leverage early: Another way to create wealth over the longer term is to take loans wisely. Home loans are an important instrument that one could use from fairly early in life. It has been observed in most developed countries that people build property assets by taking loans and upgrading throughout their life. Home loans also offer tax advantage. While home loans can be useful, excessive debt on credit cards, personal loans or margin lending (against stocks) can be dangerous - use such debt only with care.

5. Manage your portfolio: It is normally wise to take profits along the course of your investment period and reinvest into the lows. While very few can time markets, it is important for investors to remain flexible in terms of liquidating assets, booking profits and waiting to pick new assets at the lower end of price cycles. Being brave is key, especially in turbulent economic times.

6. Plan tax wisely: It is important to plan taxes well. There are approved tax breaks like the ones on home loans and 80c that should be considered carefully. In closing, it must be highlighted that the above ideas are just pointers. It is important that you seek advice on your finances and taxes from professionals early on. Should you find good ones, there may be a chance of getting to the number !

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