How to Walk Away With Profits on Losing Stocks

It’s one of the most frustrating things an investor can experience…

Thanks to some supposed global calamity in the making, the stock market enters a period of insane volatility. Each bit of news is parsed by the financial media, and then the major indices swing wildly — sometimes even in direct conflict with the “goodness” or “badness” of the news itself.

After a few months of this — and more than a few sleepless nights — you check your computer screen to find the stocks in your portfolio are right back where they were before.

It’s times like this that can lead an investor to ask: “Is all of this worry even worth it?”

But what if I told you that these periods of intense market volatility are prime time for one of the safest, most reliable ways to earn extra income? (What’s more, you don’t even necessarily have to be “right” about the stocks you pick.)


I personally can’t think of a better strategy for investors of all stripes in the current market environment.

A Conservative, Reliable Way to Boost Your Income

Many investors own stocks and simply hope that dividends and capital gains will be enough. Hope isn’t a strategy, though. And studies show that most individual investors underestimate how much money they’ll actually need during retirement.

Covered calls can help get you there.

For those who are unfamiliar, covered calls let you make a deal with other traders who want to pay you cash upfront — money that goes straight into your brokerage account — for the opportunity to buy a stock you already own at a higher price.

So you collect this cash immediately and then potentially get more money from selling your shares at a profit. You can sell covered calls on most publicly traded stocks, and you can repeat the process over and over to generate more income.

It’s one of the most conservative ways around to generate extra income from the stocks you already own.

Just ask my colleague Amber Hestla, head of Profitable Trading’s Maximum Income service. Amber teaches traders how to use this entry-level options strategy to earn hundreds — sometimes even thousands — of dollars in extra income.

An Example of a Covered Call Trade

A covered call strategy requires you to sell call options on a stock you just bought or already own. For every 100 shares you own, you can sell one call option, and in return, you are paid a premium.

Since you earn this income upfront, it offsets some of the downside risk in the stock by reducing your cost basis. And because you own the shares, you still get to participate in some of the upside.

Let’s use Phillips 66 (NYSE: PSX) as an example. Shares were recently trading for about $88. Let’s say you bought 100 shares at that price. You could sell a call option on Phillips 66 that expires in May with a strike price of $95, which trades for about $1.20.

This means if you execute this trade, you’ll earn a premium of $120 ($1.20 x 100 shares). That’s a return of 1.4% ($120 premium/$8,800 cost of shares). That may not sound like much, but it’s money you wouldn’t have had otherwise. It’s also roughly half of PSX’s current annual dividend yield. What’s more, once this trade expires in May, you can repeat a similar trade again and again. (For the record, if we annualize this trade out, you’d earn income of 7.8% from your position in addition to dividends.)

Now, as long as the stock price stays below $95 on the date the options expire, you get to keep your shares. Conversely, if the share price rises to $95 or above, you’ll sell the shares for $95. Since your cost basis is $86.80 (the $88 per share paid minus the $1.20 premium you received), you see a net profit of at 9.4% in 64 days. That’s an annualized return of 54%.

Win With Covered Calls Even When You’re Wrong

Now here’s where covered calls can really save your bacon. Let’s say you recently bought 100 shares of Phillips 66 thinking they would rise. But something happens that you didn’t anticipate (like an earnings miss) and the stock drops by 5% to $83.60.

If the stock stays at that level through May 20, then you’ll keep the $120 per contract and continue to own the stock. Since you own PSX at a cost basis of $86.80, what would have been a 5% loss is now only a 3.7% loss. 

That helps soften the blow a bit. And since you had enough faith in the company to buy shares in the first place, you should be able to sleep soundly knowing that either the stock price will rise or that you can hold on and keep selling covered calls on the position. The latter lets you earn income (not to mention collect regular dividends), reduce your cost basis and minimize losses until things turn around.

This isn’t just theory, either. As Amber points out, this is exactly what happened with one of her recent trades in Maximum Income, Goodyear Tire & Rubber Company (NYSE: GT):

Since we opened the position on June 26… shares have fallen slightly from $31.33 in June to $30.12 today, a 3.9% decline.

GT STock

But Maximum Income subscribers actually have a gain in Goodyear Tire.

How is this possible?

Even though our shares have declined in price, the money we’re generating from selling options counters the loss. Essentially, while other investors sit back and hope the gains will come to them, we’re using covered calls to actively create the gains we want to see.

For every 100 shares we own, we’ve been able to collect $220 from selling four covered calls, as well as an additional $20 in dividends — more than enough to cover the $121 drop in our shares’ value. If we’d simply been holding shares of GT this whole time, we’d only have received the $20… and we’d be down $101 on our position.

Of course, covered calls are not risk-free. No investment is. But they can help you reduce risk, which is every bit as important as income and capital gains.

In this market, where safe income is tough to find, selling covered calls on high-quality stocks could be one of the best — and easiest — strategies available. In fact, Amber has released a short video detailing how you could “skim” up to $850 a week in extra income from Wall Street by using her strategy. You can watch it here.