How the ‘Money Net’ Scoops up Premium Better than Covered Calls

The over-hyped and  time-worn strategy of “selling covered calls” does have a SEXY ring to it. The idea is that you can take a stock (that you’re already happy to own) and take INcome while you sit on it… well, it appeals to a large amount of college educated, middle class to affluent, retirement age guys and gals.

Too bad it’s mathematically flawed and will end up taking all your savings if you play it long enough.


Yeah, I said it. And unless the attendees to my free semiweekly options trading education webinars are LYING… it’s happening too fast to too many people. I’m not happy about it and am trying to help people free themselves of the two biggest problems about trading with covered calls…

…but, that idea of getting PAID while you wait still mournfully gives its siren call.

In this post I’ll share ONE of TEN “Income Method” adjustments that I make to a protected trade, to take out a leeedle bit o’ money while at the same time leaving the upside potential for growth wide OPEN.

Here’s a recent trade I showed Fission’ Members (my online ongoing education membership). Here’s a simplified version of the setup:

I own 200 shares of CTSH, protected by put options. On 12/27, the February 2011 $72.50 calls are selling for $3.90 and the February 2011 $75 calls are bidding at $2.45.

Income Method #5, “The Money Net”, goes like this… sell two $75 callsagainst the 200 shares for $2.45 each, raising a total of $4.90 premium. Use some of the proceeds to buy one $72.50 call for $3.90. Immediate result? $1 total credit received, while holding 200 shares and one long call. Against the 200 shares, 2 long calls have been sold at the $75 strike.

Say we hold all the way until expiration. If CTSH is below $72.50, all calls expire worthless and we get to keep the $1 credit.

If CTSH closes at, say, $73.50… then the $75 calls still expire worthless but the $72.50 calls are in the money by $1.00. We can sell the call and pick up $1.00 on expiration Friday in the closing minutes. The second$1.00 credit is “CAUGHT” in ‘The Money Net’! So that’s $1 at the beginning, plus $1.00 more later on for a total of $2.00.

But that isn’t what happened. Actually, CTSH went up by more than that… on expiration Friday it was apparent to me that the short calls were going to call away all 200 shares of the stock. I don’t want this to happen, so I pick up 100 shares at $76.48. Now watch this…

I’m now holding 300 shares CTSH and it’s expiration Friday. I’m holding one $72.50 long call and have two $75 short calls, and I’ve gotten a total $1 credit.  IN the middle of the night, my broker will “automatically exercise” my right to buy 100 more shares at $72.50. That brings me up to 400 shares of stock, but not for long.

200 of those shares get delivered in that same way… in the middle of the night, by automatic exercise… for $75 apiece. That leaves the original 200 shares and the put options protecting them, plus a nice little bonus of $2.02 “caught” in the ‘Money Net’!

Complicated? Naw, just work it out like so, going backwards: Buy 100 shares for $76.48 on expiration Friday. Buy 100 more in the middle of the night for $72.50. That’s $148.98. Now take off a dollar from the “Money Net” trade… total spent of $147.98, for 200 shares, which shares are delivered for a total of $150.00. The $2.02 difference is “banked” and we get to keep the original 200 shares we were holding.

So the ‘long’ and the ‘short’ of it 😉 sorry, couldn’t resist the trading pun… is that I’ve been paid $2.02 to hold on to a stock that’s run up past the strike price of the short calls I’ve used to generate that premium.

Try THAT with covered calls 🙂 My Income Method #5: “The Money Net” trade caught some bank while leaving the upside open. It far outweighed the benefit of selling a “plain vanilla” covered call. Had I simply sold two calls at $2.45 apiece, then bought them back on Expiration Friday for $1.50 or so, I would have collected less ‘net’ premium. But the biggest problem would be that I would also cap the upside if the stock had blown its doors.

The biggest question I get when I show folks this Ratio Call Spread trade, done within the context of a married put, is this: “Can I do this in an IRA?”

Yup. And you’re likely to do a darn sight better knowing this and the other nine Income Methods than with just selling covered calls.

In the next installment I’ll show how this particular trade made for unlimited upside in case of a big run up, something that selling covered calls does not do. Til then…

Happy Trading,


 P.S. Hey, I do a free weekly options trading webinar at 12:00 noon Tuesdays and Thursdays. The March 1 and March 3 editions will have this trade, only more detailed and using PowerOptions tools for analysis.  Come and see!

I’ll also show how I’ve made the position “BULLLETPROOF”, meaning that the adjusted cost basis for both the stock and the puts protecting them… is now LOWER than the strike price of the put. So I can run the “Money Net” again and potentially take out more premium than a covered call, but CAN’T lose if the stock goes down.

Also, the upside is unlimited in the case of the stock going for the moon. You can’t do that with plain vanilla covered calls, I guarantee it! Come to and look to the right for registration information for the March 1 and March 3 webinars, no charge.

About Kurt Frankenberg

Kurt Frankenberg is an author and speaker about entrepreneurship, martial arts, and trading the stock and options markets. One of several "Biznesses" he founded as a teen, The Freedom School of Martial Arts, has been in continuous operation since 1986. Kurt lives in Colorado Springs with his wife Sabrina, German Shepherd Jovi, and his ninja cat Tabi.