By Steven M. Sears

You can never be better than your fundamentals.

Everyone thinks they will rise to the occasion when they are under pressure, but many investors are prisoners of their experience. In the markets, duress always reveals whether participants have the skills that help them make better decisions.

This phenomenon should be increasingly on display when President Donald Trump unveils his tariffs on Wednesday.

Millions of momentum traders, who often get their trading ideas from social media, should be especially hard hit, as buying high and selling higher isn't working so well in these early days of the Trump administration.

We have warned since January of ill winds, reasoning that investors would recoil from Trump's ambitious tariff agenda. Economists are now warning of a recession, and bank strategists are lowering their 2025 stock market predictions. All this serves to ramp up market volatility and exacerbate instability.

The stock market remains in the precarious position of reacting to what cannot be anticipated. Trump recently threatened, for instance, to increase tariffs beyond original levels. The unexpected news startled investors.

For long-term investors, the tariff trauma should be looked upon as an opportunity to return to fundamental strategies.

No strategy is more elemental than selling covered-call options on stocks that an investor already owns. The approach offsets some of a stock's lost gains, and takes advantage of the many momentum traders who will almost certainly keep buying calls even though the market has changed.

The strategy is simple. Just sell a call that is 5% to 10% above an associated stock's price that expires in six weeks or less. Each covered-call sale should generate an options premium of about 1% to 2% of the stock's price.

The return lacks the adventurism of buying low-price calls to harness stock momentum or of complicated strategies that so many investors think will help them outsmart the market mob. And that's OK. A return to simplicity is often best when markets are unpredictable.

By selling calls against stocks, investors get paid by the options market to own stocks. The strategy works for most equities an investor is willing to own for at least several years. To illustrate, we will use Alphabet, a leading technology stock that has suffered much this year.

With Alphabet's C class shares at $158.88, the May $175 call could be sold for about $2.40. If the stock remains below the strike price, the call premium is kept. Should the stock exceed the strike before expiration, investors should roll the option -- that is, adjust its expiration date -- to avoid having to sell the stock.

To manage the risk that the stock surges higher than the strike price, investors often focus on calls that expire in less than two months. Short-dated calls are easier to manage than longer expirations.

When the profit on a covered call hits 50% to 70%, many investors take profits. Others roll the position after reviewing the stock's technical charts to reconfirm its market dynamic.

The strategy's weakness is the potential to miss gains if the stock surges far beyond the call strike price before an investor reacts. In that event, an investor gains an opportunity to practice another fundamental strategy: selling put options to buy stocks at lower prices.

Both strategies are building blocks of the options market, and fundamental skills that position investors to take more from the markets than the market takes from them. Anyone who blends them with mental toughness and strong risk awareness should find themselves in possession of a strategic edge that will help them make better financial decisions.

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(END) Dow Jones Newswires

April 04, 2025 21:30 ET (01:30 GMT)

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