It is amazing to me that not many retail investors understand the concept of generating cash flow from their stock positions. When I tell people that I utilize covered calls to generate extra income, hedge my stock positions, and set strict sell disciplines they look at me like I am crazy. I was introduced to the concept from a stockbroker. The idea of writing covered calls is the only option strategy that you can employ at most of the major brokerage firms for your IRA investments. The reason is that writing covered calls is a very conservative strategy relative to other option strategies.
Covered call writing is very simple to understand. It basically says that I'll give you $5,000 now, if you allow me to buy your stock 3 months from now at a certain price. If I choose not to exercise this option, you keep the money and we part.
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 deposited into my brokerage account immediately. My brokerage company will not allow me to sell my stock prior to 6 months unless I buy back the option on the open market. With big fluctuations in option prices, I usually hold my stock until the expiration date.
Six months from now, one of two things can happen. One, the stock rises above $12.50 and the person "calls" me out of my position which is great because remember, I bought the stock for $10. The second possibility is that the stock falls below $12.50 which makes the option worthless. Why does it expire worthless? Think about it. Why would the option holder "call" the stock away from me at $12.50 when she can just buy the stock for $11.45 on the open market?
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.
I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.
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.
Keep in mind that you should consult with a tax professional and a financial adviser before you begin risking your money on any options strategy. - 23204
Covered call writing is very simple to understand. It basically says that I'll give you $5,000 now, if you allow me to buy your stock 3 months from now at a certain price. If I choose not to exercise this option, you keep the money and we part.
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 deposited into my brokerage account immediately. My brokerage company will not allow me to sell my stock prior to 6 months unless I buy back the option on the open market. With big fluctuations in option prices, I usually hold my stock until the expiration date.
Six months from now, one of two things can happen. One, the stock rises above $12.50 and the person "calls" me out of my position which is great because remember, I bought the stock for $10. The second possibility is that the stock falls below $12.50 which makes the option worthless. Why does it expire worthless? Think about it. Why would the option holder "call" the stock away from me at $12.50 when she can just buy the stock for $11.45 on the open market?
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.
I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.
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.
Keep in mind that you should consult with a tax professional and a financial adviser before you begin risking your money on any options strategy. - 23204
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
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