As turnaround investors, a lot of times we have to wait. Turnaround investors basically buy investment in distressed companies at distressed price hoping that the company can right the ship and turn itself around. Once it happens, turnaround investors will be rewarded handsomely for their faith in the company. Would it be nice if we can get paid while waiting for the company to turnaround? As a matter of fact, we can !

One of the oldest method of getting paid while we wait is by picking a dividend-paying company. While the turnaround is in progress, investors will be able to generate returns from the dividend yield while the stock price barely budge.

Another excellent ways of boosting your investment return is by selling covered call options. Selling covered call basically means that you as the stock owners, sell the right of your stocks at a predetermined strike price. For example, if you are selling calls at a strike price of $ 20, this means that you have to sell your stock to the option buyer at that price if the buyer demanded so. What you will get in return is free cash generated from selling this option. What is the prerequisite? It is pretty simple. To sell covered call, all you need is to own 100 shares ( and its multiples) of the stock.

If you are still confused, that is okay. An example will make everything clearer. Let's say that you buy 100 shares of Shanda Interactive (SNDA) recently at a price of $ 13.55. You decide to sell a covered calls expiring on January 2007 with a strike price of $ 15. Recent price indicates that you can sell the covered calls at $ 2.20 a share. You decide to sell the covered calls. As a result, you netted $ 220 of cash right off the bag!

So, wait a minute. How does this trade works? Did you just get $ 220 in cash? You bet. What is the drawback of this trade? There are three that I have known of.

1. Limited Return. When Shanda rose to $ 30 before January 2007, well then you still have to sell your shares to the option buyer at $ 15. In return, he is giving you $ 220 whether Shanda stock goes up or down.

2. No protection of a loss. Share price can either go up or it can go down to $ 0. Therefore, there is always a risk that Shanda share will go to $ 0. When it does, you still pocket the $ 220 made from selling covered calls. However, the shares that you bought at $ 13.55 will be worthless. Therefore, your total loss in this scenario is $ 1,355 - $ 220 = $ 1,135 or 84%.

3. Need to own 100 shares and its multiples. When selling covered calls, you need to sell one contract, at a minimum. One contract represents 100 shares of stocks. Therefore, if you own 50 shares of Shanda, you cannot sell one contract of covered calls.

Selling covered call has its own advantages. Here are two advantages that I can think of:

1. Guaranteed Return. This return is only assured when Shanda stock price stays the same or going up. If Shanda shares remain at $ 13.55 by January 2007, your one year total return will be $ 220 or 16.3%. You have beaten the market indices by simply selling covered calls. Can you sell another covered calls if Shanda share remains at $ 13.55 by January 2007? You bet! You can sell another covered calls expiring on January 2008 with strike price of $ 15. This will net you another 16.3% next year. In essence, you will be getting 16.3% of your money year in and year out.

If Shanda rises to $ 20, you have to sell your shares at $ 15 to the option buyers. In this case, your total return will be $ 220 + 100 shares x ($ 15 - $ 13.55) = $ 365 or 27%. This is still good.

2. No Dividends payment needed. With covered calls, you do not have to bank on the company's dividend. You still can get your investment return as the example suggested. This will enables you to look for potential investment in technology area where companies seldom pay dividend.

Although I have listed more disadvantages than advantages, selling covered call is a better way to invest than regular stock buying strategy. Combining your skill of predicting fair value and selling covered calls, will give us guaranteed return even if stock price barely budge. Would you want to gain more while risking less? I do. This strategy is one way to achieve that.

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