Everything You Always Wanted To Know About Covered Calls
Most people who are invested in the stock market do not know that they can generate cash flow from their positions. The idea was first introduced to me back in'98 by a fellow trader. The strategy is called covered call writing. Covered call writing is considered so safe that even brokerage firms that manage IRA accounts allow you to write covered calls.
Covered call writing is usually easier than most people make it out to be. It works like this. I'll give you $1,000 now, if you let me buy your stock five months from now at a set price. If I want to walk away from the deal, you get to keep my money.
Ok so now let us go in more detail. I buy 1000 shares of CDE at $10 and the stock goes to $11 a few weeks later. I can generate cash flow in my position by selling someone the option to buy the stock from me 6 months from now at $12.50. For that option, the buyer is willing to give me $0.50 per share or $500 right now.
The $500 is immediately deposited into my brokerage account, but an option position also shows up on my statement. I can not sell the stock prior to 6 months unless I buy back the option in the open market. The option price can fluctuate from day to day, therefore, I typically hold my stocks until expiration.
Six months from now, two things can happen. One, the stock goes above $12.50 and the person "calls" me out of the position, which I am more than happy to do since I bought it at ten. Second, the stock has declined below $12.50 and the option holder is holding on to a worthless option. The option holder would not "call" the stock from me at $12.5 when he or she might be able to buy it in the open market at $11.50.
You then start the process all over again by writing another call against your position.
Are you beginning to see how cool this strategy is? Here is what I just accomplished. First of all, I lowered my cost basis by 5% or $500. Secondly, I drew a line in the sand and said this is what I'm willing to sell the shares for, $12.50. Third, I generated instant income that I could use for Christmas or just reinvest.
This strategy has made me very happy in bear markets because most options expire worthless and I get to keep my stock and what the option buyer originally paid me for the option!
There are a variety of software programs available that will let you spot the best stocks to buy, then write covered calls against. Of course you do not need any software. The software just saves you some research time.
But remember, any option strategy involves more risk than just buying a stock so always consult with a licensed financial adviser first. - 23311
Covered call writing is usually easier than most people make it out to be. It works like this. I'll give you $1,000 now, if you let me buy your stock five months from now at a set price. If I want to walk away from the deal, you get to keep my money.
Ok so now let us go in more detail. I buy 1000 shares of CDE at $10 and the stock goes to $11 a few weeks later. I can generate cash flow in my position by selling someone the option to buy the stock from me 6 months from now at $12.50. For that option, the buyer is willing to give me $0.50 per share or $500 right now.
The $500 is immediately deposited into my brokerage account, but an option position also shows up on my statement. I can not sell the stock prior to 6 months unless I buy back the option in the open market. The option price can fluctuate from day to day, therefore, I typically hold my stocks until expiration.
Six months from now, two things can happen. One, the stock goes above $12.50 and the person "calls" me out of the position, which I am more than happy to do since I bought it at ten. Second, the stock has declined below $12.50 and the option holder is holding on to a worthless option. The option holder would not "call" the stock from me at $12.5 when he or she might be able to buy it in the open market at $11.50.
You then start the process all over again by writing another call against your position.
Are you beginning to see how cool this strategy is? Here is what I just accomplished. First of all, I lowered my cost basis by 5% or $500. Secondly, I drew a line in the sand and said this is what I'm willing to sell the shares for, $12.50. Third, I generated instant income that I could use for Christmas or just reinvest.
This strategy has made me very happy in bear markets because most options expire worthless and I get to keep my stock and what the option buyer originally paid me for the option!
There are a variety of software programs available that will let you spot the best stocks to buy, then write covered calls against. Of course you do not need any software. The software just saves you some research time.
But remember, any option strategy involves more risk than just buying a stock so always consult with a licensed financial adviser first. - 23311
About the Author:
Do not buy any stock trading education materials until you see Lance Jepsen's free stock market blog at how to invest in stock market, and learning the stock market
posted by Mr. Forex at
3:51 AM
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