Frequently Asked Questions relating to covered calls:

Q1. Margin Lending - How much can I borrow (ie, total value of investment)?

A1. Under normal circumstances, you can safely borrow $2 for every $1 worth of cash or about 75% of the shares you deposit. (can do more but not recommended), however please note that in extreme market movement that generally occur once or twice a decade, clients in that position could stil experience a margin call. A margin call can mean loosing most, all, or under some circumstances more than the original investment.

Q2.  Margin lending - How long do I take out the loan for?  If it's interest only, I guess this is irrelevent?

A2. The period of the loan is indefinate. When you sell the shares purchased on margin your loan has in effect ended. When you purchase shares the loan re-starts.

Q3.  What are my interest repayments going to be based on the answer to question 1?

A4. Current interest rates are around 9% so your monthly interest bill on $100,000 would be 9% / 12 x 100,000 which is $750 per month for every $100,000 borrowed. The minimum target for gross income using the strategy is 2% per month. So you would expect your returns to easily cover the interest 2 times over.

Q4.  Adviser fees/commissions.  Is this a per transaction, is this paid to you when premiums are paid to me?  Are you able to explain to me how much it is and how it's calculated and paid to you?

Yes fees are per transaction and is included in the balance of each trade. So you receive the option premium (income) net of brokerage. When you purchase shares, brokerage is included in the price of the purchase.

Q5. Marging Lending - If I want to increase the invested amount later in the year, how much will it 'cost' me to do so?  Is it a type of loan where I only pay interest against what I use, and can therefore use as little or as much as I want at any time?

A5. You've got it, generally you are only charged interest on what you are using (subject to a $20,000 minimum).

Q6. A few websites I've been to seem to indicate that a 5% return is a high expectation, and that a 2-3% return is more realistic.  So, I need to work out what my costs are and what the minimum return is to breakeven.  Given my objective is to increase my net income each month, the last thing I feel I have the ability to deal with is an increase in expenses.

A6. That's understandable. Each time you are about to use the strategy, your adviser would calculate the return and would not advise you to own shares if they are not expected to offer a good return (in the realistic range of 2-3%)

Q7. It's also something that people I run it by, say it seems 'too good to be true'.  I factor in that it could seem that way.  However, no one I spoke to has ever heard of it.  Is this something new or just something not done that often? 

A7. It's sure true, every month there are many shares that will return 2% or more per month (24-36% a year)?. That no one has heard of it is an example of why we need to educate more people on this fantastic opportunity.

Q8. I also read about the motivation for someone to buy (the premium payers) covered calls.  I guess they can make a lot of profit for a small investment - but that seems like a high risk or expectation... is it?  Are you able to explain to me why people are motivated to pay the 'premiums' for covered calls - I guess like any business, I look at what motivates the market to buy if you're selling something, which in this case, seems to be a guaranteed future price for a share.

A8. Generally there are 2 classes of participants in any market. There are traders and investors. Traders like buying options because they have limited risk to the premium. However it is a proven fact that only one third of options active at expiry have any intrinsic value (are "in the money").

Q9. Do you invest it all in one stock's options, or do you spread it amongst all blue chip companies at any given time?  I guess I don't need to know the ins and outs of your actual strategy, but wondered if there is a diversification each month, etc. or do you buy all of one type?

A9. Good question. This is one reason why the bigger the amount of money you do it on the better. You can spread your investment to 5 different blue chip shares and get more consistent results each month.