Selling Options to Earn Additional Monthly Income

Posted on 29. Nov, 2010 by GuestPoster in Options

Investing in the stock market is a great way to allow your money to work for you.  There is something truly magical about watching a $500 investment turn into $1000 as the value of your investment increases.  Most investors prefer to simply buy high quality stocks and watch them grow in value over time.  There are, however, alternative techniques that can allow the investor to generate income now.  Perhaps the most effective way to do this is selling covered calls.

Call options work best when used on stocks that an investor already owns.  Essentially, calls are contracts that give the buyer the right to buy a predetermined number of shares for a certain price sometime in the future.  Of course, the buyer is not obligated to buy the stock but merely has the right to buy it if it makes financial sense to do so.

As an example, let’s say that you own shares of a stock that is currently trading at $28 a share.  The price of these shares has remained in a relatively tight trading range for the past few weeks and you decide that you would like to earn some additional income from this position.  Additionally, since the stock has been trading in such a tight range for the past six months, you feel that it is likely to continue doing so for at least another month or two.  Based on these assumptions you decide to sell an option that has a $30 strike price that expires in two months.

In return for selling this option to buy your stock you will receive income, called a premium, which is yours to keep no matter what happens to the price of the stock.  This income is immediately deposited into your account and is yours to do as you please with.  If the price of the stock stays below the strike price you get to keep your stock and the premiums.  If the price rises above the strike price you may be forced to sell some of your stock at $30 per share.  Regardless of the outcome of this transaction, covered call writing is a great way to earn additional income from stocks that you already own.

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Tags: call options, covered calls, selling covered calls